[Senate Hearing 117-291]
[From the U.S. Government Publishing Office]

















                                                        S. Hrg. 117-291


                    THE REEMERGENCE OF RENT-A-BANKS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED SEVENTEENTH CONGRESS

                             FIRST SESSION

                                   ON

            EXAMINING THE REEMERGENCE OF RENT-A-BANK SCHEMES

                               __________

                             APRIL 28, 2021

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                     SHERROD BROWN, Ohio, Chairman

JACK REED, Rhode Island              PATRICK J. TOOMEY, Pennsylvania
ROBERT MENENDEZ, New Jersey          RICHARD C. SHELBY, Alabama
JON TESTER, Montana                  MIKE CRAPO, Idaho
MARK R. WARNER, Virginia             TIM SCOTT, South Carolina
ELIZABETH WARREN, Massachusetts      MIKE ROUNDS, South Dakota
CHRIS VAN HOLLEN, Maryland           THOM TILLIS, North Carolina
CATHERINE CORTEZ MASTO, Nevada       JOHN KENNEDY, Louisiana
TINA SMITH, Minnesota                BILL HAGERTY, Tennessee
KYRSTEN SINEMA, Arizona              CYNTHIA LUMMIS, Wyoming
JON OSSOFF, Georgia                  JERRY MORAN, Kansas
RAPHAEL WARNOCK, Georgia             KEVIN CRAMER, North Dakota
                                     STEVE DAINES, Montana

                     Laura Swanson, Staff Director

                 Brad Grantz, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                         Tanya Otsuka, Counsel

                 Beth Cooper, Professional Staff Member

                 Dan Sullivan, Republican Chief Counsel

                  Alexander LePore, Republican Detail

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                    Charles J. Moffat, Hearing Clerk

                                  (ii)






















                            C O N T E N T S

                              ----------                              

                       WEDNESDAY, APRIL 28, 2021

                                                                   Page

Opening statement of Chairman Brown..............................     1
        Prepared statement.......................................    31

Opening statements, comments, or prepared statements of:
    Senator Toomey...............................................     3
        Prepared statement.......................................    32

                               WITNESSES

Josh Stein, Attorney General, State of North Carolina............     6
    Prepared statement...........................................    33
    Responses to written questions of:
        Senator Cortez Masto.....................................    88
Lisa F. Stifler, Director of State Policy, Center for Responsible 
  Lending........................................................     7
    Prepared statement...........................................    37
    Responses to written questions of:
        Senator Cortez Masto.....................................    89
Reverend Dr. Frederick D. Haynes, III, Senior Pastor, Friendship-
  West Baptist Church, Dallas, Texas.............................     9
    Prepared statement...........................................    72
Brian P. Brooks, Former Acting Comptroller of the Currency.......    10
    Prepared statement...........................................    79
Charles W. Calomiris, Henry Kaufman Professor of Financial 
  Institutions, Columbia Business School.........................    12
    Prepared statement...........................................    82

              Additional Material Supplied for the Record

Letter in support of S.J. Res. 15 and H.J. Res. 35...............    92
Letter in support of CRA challenge to OCC predatory lending rule.   102
Letter from The Faith for Just Lending Coalition.................   130
Letter from Kwame Raoul, Attorney General, State of Illinois.....   132
Letter from NACA.................................................   143
Letter from NAFCU................................................   146
Letter from Nick Bourke, Director, Consumer Finance, The Pew 
  Charitable Trusts..............................................   153
Amicus brief: People of the State of California v. The Office of 
  the Comptroller of the Currency and Brian P. Brooks............   156
Letter from the Electronic Transactions Association..............   182
Statement submitted by ICBA......................................   185

                                 (iii)

 
                    THE REEMERGENCE OF RENT-A-BANKS

                              ----------                              


                       WEDNESDAY, APRIL 28, 2021

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met, via Webex, Hon. Sherrod Brown, Chairman 
of the Committee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Chairman Brown. The Senate Committee on Banking, Housing, 
and Urban Affairs will come to order.
    This hearing is in the virtual format. A few reminders as 
we begin.
    Once you start speaking, there will be a slight delay 
before you are displayed on the screen. To minimize background 
noise, please click the mute button until it is your turn to 
speak or to ask questions.
    You should all have one box on your screens labeled 
``Clock'' that will show how much time is remaining. For 
witnesses, you will have 5 minutes for your opening statements. 
For all Senators, the 5-minute clock still applies, of course, 
for your questions.
    At 30 seconds remaining, you will hear a bell ring to 
remind you your time is almost up. It will ring again at zero.
    If there is a technology issue, we will move to the next 
witness or Senator until it is resolved. And to simplify the 
speaking order process, Senator Toomey and I have agreed to go 
by seniority for this hearing.
    Emerson teaches us that history is a battle between what he 
called ``the innovators'' and ``the conservators.'' The 
innovators work to find new ways to make Government work for 
the people it serves and deliver results for everyone.
    But the conservators--the corporations, the special 
interests, the elite who have amassed wealth and power at the 
expense of workers and their families--the conservators never 
give up.
    So it is with predatory lending.
    In the late 1990s, payday lenders were desperate to find a 
way to evade State laws that limited them from charging 
exorbitant interest rates that trap people in a cycle of debt 
they cannot get out of, no matter how hard they work.
    They came up with what the OCC called ``rent-a-charter''--
what we now know as the ``rent-a-bank'' scheme.
    Because banks are generally not subject to these State 
laws, payday lenders funneled their loans through a small 
number of willing banks. It looked like the banks were making 
the loans when really it was the payday lenders.
    Federal regulators, Republicans and Democrats, saw through 
this ruse.
    Under President Bush, the OCC described these rent-a-bank 
schemes as ``abusive''--their words--and later warned about 
banks that ``rent out their charters to third parties who want 
to evade State and local consumer protection laws.''
    In the years that followed, the OCC and FDIC shut down a 
series of these schemes by payday lenders and banks.
    States from across the country also stepped in to crack 
down.
    The Georgia Legislature in 2004 passed a law to crack down 
on rent-a-bank schemes. Regulators in West Virginia and the 
Ranking Member's and my home States of Pennsylvania and Ohio 
and New York and Maryland and other States followed suit.
    States also passed new laws to limit interest rates on 
payday loans.
    Since 2010, Montana, South Dakota, Colorado, Illinois, 
Virginia, and last year Nebraska all passed laws to cap 
interest rates on payday loans at 36 percent--still a very high 
number that will make any company plenty of money.
    Several other States, including California and Ohio, also 
passed laws to limit the interest that can be charged on 
consumer loans.
    These new laws passed with overwhelming, bipartisan 
support.
    More than 75 percent of voters in Nebraska and South Dakota 
supported the ballot initiatives to cap interest rates on 
payday loans.
    In recent years, new fintechs have emerged that partner 
with banks to offer responsible small-dollar loans at 
affordable rates.
    Of course, the payday lobby did not give up. We now have a 
separate group of online payday lenders resurrecting the same 
old rent-a-bank scheme and not even attempting to hide it.
    One online lender recently told its investors that it would 
get around California's new law by making loans through ``bank 
sponsors that are not subject to the same proposed State level 
rate limitations.'' Another one said ``There is no reason why 
we would not be able to replace our California business with a 
bank program.''
    Given the broad, bipartisan support for these laws, we all 
hoped that the Trump OCC would take action and crack down on 
these schemes--schemes that have been rejected by voters and 
legislatures in State after State.
    The last Republican administration under President Bush 
stood up for consumers on this point.
    But last year, the OCC issued what is known as the ``true 
lender rule,'' overruling voters of both parties and giving a 
free pass to these abusive rent-a-bank schemes.
    The rule was rushed through by the Acting Comptroller who 
cut his teeth helping banks ruthlessly foreclose on homeowners 
and a Deputy Comptroller with deep ties to the payday lobby. 
Republicans have selected the two of them to be witnesses at 
today's hearing.
    The OCC and Mr. Brooks have argued that the true lender 
rule is necessary so that the agency has the necessary 
authority to oversee banks' relationships with payday lenders.
    But that is just not true. The OCC did not lack any 
authority when it cracked down on rent-a-bank schemes in the 
early 2000s.
    The OCC also attempted to justify its efforts by claiming 
that it promotes ``innovation'' and provides ``certainty'' to 
the markets.
    The only certainty we need is the certainty that workers 
and their families will be protected from these exploitative 
interest rates.
    The last thing we should be doing is encouraging lenders 
to, in their words, ``innovate.'' We know that just means new 
ways to get away with ripping people off.
    That is why across the country, a broad, bipartisan 
coalition is asking Congress to overturn the OCC's harmful true 
lender rule.
    That support includes the National Association of 
Evangelicals, the Southern Baptist Convention, and other 
members of the Faith in Just Lending Coalition.
    That coalition wrote to Congress: ``Predatory payday and 
auto title lenders are notorious for exploiting loopholes in 
order to offer debt trap loans to families struggling to make 
ends meet. The OCC's `true lender' rule creates a loophole big 
enough to drive a truck through.'' That was the Faith in Just 
Lending Coalition words.
    I would also like to submit the entire letter for the 
record, along with letters from a bipartisan group of State 
Attorneys General, State bank regulators, 375 consumer, civil 
rights, labor, and small business organizations asking Congress 
to overturn the true lender rule.
    Today we will hear from one of the members of the faith 
coalition, Dr. Frederick Haynes, senior pastor of Friendship-
West Baptist Church in Dallas.
    We will hear today from North Carolina Attorney General 
Josh Stein. He represents a bipartisan coalition of State 
Attorneys General, including the Republican Attorneys General 
in Nebraska and South Dakota, who have called on Congress to 
overturn the OCC's true lender rule.
    Like so much we do, this comes back to one question: Whose 
side are you on? You can stand on the side of online payday 
lenders that brag about their creativity in avoiding the law 
and finding new ways to prey on workers and their families. Or 
we can stand up for families and small businesses and the State 
Attorneys General and State legislatures who have said, 
``Enough'' and are trying to protect themselves and their 
States from predatory lending schemes.
    Some issues that come before this Committee are 
complicated, they divide people, there are thorny nuances to 
consider. This really is not one of them. It is simple: Stop 
predatory lenders instead of encouraging them.
    Ranking Member Toomey, you are recognized. Thank you.

         OPENING STATEMENT OF SENATOR PATRICK J. TOOMEY

    Senator Toomey. Thank you, Mr. Chairman.
    You know, in the last decade, we have seen financial 
technology companies--fintechs--driving amazing new innovations 
in financial markets. Fintechs have had remarkable success in 
developing technology-oriented solutions to meet consumers' 
needs.
    As many banks have exited the personal loan market, 
fintechs have filled the gap, and today they issue nearly 40 
percent of all the unsecured personal loan in America.
    In recent years, both nationally chartered and State-
chartered banks and credit unions have begun to partner with 
fintechs to offer improved products and reach more customers. 
This is particularly beneficial for community banks, who often 
lack the resources to develop banking technology. In fact, 65 
percent of community banks consider fintech partnerships 
important to their business strategy.
    These partnerships also generate significant consumer 
benefits. Bank-fintech partnerships generate efficiencies that 
can lower the price of financial products, expand consumer 
choice, and increase competition. And these bank-fintech 
partnerships offer a large variety of credit products--not just 
small-dollar loans but credit cards, home equity lines of 
credit, personal loans, auto loans, mortgages, and small 
business loans as well.
    Unfortunately, recent court rulings have applied differing 
legal tests to determine which partner in these relationships 
is the true lender who is legally responsible for the loans. 
And these tests have created uncertainty that threaten to 
reduce the access to credit for customers, especially for 
riskier borrowers. That is why there has been bipartisan 
congressional support and industry support for clarifying the 
issue.
    So last year, the OCC issued its true lender rule to 
provide this much-needed regulatory clarity, and the rule holds 
a national bank responsible for a loan when, at the time the 
loan is originated, the bank is either named in the loan 
agreement or it funds the loan. This allows the OCC to 
supervise these loans and ensure that the bank is not evading 
the law, including consumer protection laws.
    Contrary to some claims, the rule is not intended to 
facilitate ``rent-a-charter'' arrangements where banks do not 
comply with the law. In fact, the OCC's rule does just the 
opposite. A rent-a-charter arrangement means that no party 
takes compliance responsibility for a loan. That is where the 
true lender rule comes in and is different. It ensures that the 
national banks that partner with third parties are accountable 
for the loans they issue through these partnerships, and it 
allows the OCC to supervise the origination of these loans.
    You do not have to take my word for it. The current Acting 
Director of the OCC--not a political appointee but one who has 
been a career civil servant for more than 30 years--recently 
wrote to Congress making this very point.
    The true lender rule also provides the clarity needed for 
bank-fintech partnerships to flourish and for national credit 
markets to function. For over four decades, Federal law has 
allowed both nationally chartered and State-chartered banks to 
``export'' the State law governing interest rates from their 
home State where they are based.
    The true lender rule simply allows fintechs to partner with 
banks, which already operate with these efficiencies.
    Absent the true lender rule, uncertainty about who the true 
lender really is creates uncertainty about whether the bank can 
export its interest rate. If the bank guesses wrong, the loan 
could be unenforceable. That uncertainty jeopardizes the 
viability of the bank-fintech partnerships. More importantly, 
it disrupts the functioning of the secondary market for credit.
    Why does the secondary market matter? Because when a bank 
sells a loan, it frees up capital to make another loans. This 
is very well understood in the mortgage space. When a bank 
sells a mortgage to the GSEs, it frees up the capital to lend 
to an additional homebuyer. Well, the same principle applies to 
the secondary market here.
    Banks will likely issue far fewer loans if they cannot 
reliably sell those loans into the secondary market. Fewer 
loans means less access to credit; less access means higher 
costs and less willingness to provide the limited supply of 
credit to higher-risk borrowers. The result? The most 
marginalized consumers are hit the hardest.
    This is not just my opinion. Almost 50 leading financial 
economists from prominent universities--including Harvard, 
Stanford, and the University of Pennsylvania--made these very 
points in an amicus brief in support of the OCC's true lender 
rule.
    We have empirical evidence, too. Studies have shown that 
after a 2015 court ruling created uncertainty around the 
ability to export interest rates to New York, it became 
significantly harder to get loans in New York, especially for 
higher-risk borrowers.
    Despite the importance of the true lender rule, some, I 
know, want to rescind it using the Congressional Review Act. 
And I suspect the motivation is that overturning the rule would 
subject more loans to State interest rate caps. But that may 
not be the effect. I think the more likely effect is that these 
loans simply will not get made.
    That is why price controls are not the answer. They will 
exclude people from the banking system. They will restrict the 
credit supply and make it harder for low-income consumers to 
access credit that they need.
    The best form of consumer protection is a robust, 
competitive market. Preserving the regulatory certainty and 
clarity the true lender rule advances that cause.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Ranking Member Toomey, for your 
comments.
    I will introduce the witnesses.
    Mr. Josh Stein is Attorney General of North Carolina. As 
Attorney General, he works to protect North Carolina families 
from crime and consumer fraud. He previously served as a State 
Senator, as Deputy Attorney General for Consumer Protection in 
the North Carolina Department of Justice.
    Ms. Lisa Stifler is the director of State Policy at the 
Center for Responsible Lending. She works with organizations 
and lawmakers to eliminate abusive lending and debt collection 
practices in her State. Ms. Stifler also advocates on the 
national level on abusive debt collection and debt settlement 
practices as well as predatory auto and student lending.
    Dr. Frederick Haynes is senior pastor, activist, and 
educator with the Friendship-West Baptist Church in Dallas. Dr. 
Haynes currently serves as chairman of the board of the Samuel 
DeWitt Proctor Conference, a board member of the Conference of 
National Black Churches, and the National Action Network. He is 
a member of the board of trustees for Paul Quinn College.
    Mr. Brian Brooks is the former Acting Comptroller of the 
Currency. Prior to becoming Acting Comptroller, Mr. Brooks 
served as Senior Deputy Comptroller and Chief Operating 
Officer. Before joining OCC, Mr. Brooks worked at Coinbase, 
Fannie Mae, O'Melveny & Myers, and at OneWest Bank.
    Mr. Charles W. Calomiris is Henry Kaufman Professor of 
Financial Institutions at Columbia Business School, director of 
the business school's Program for Financial Studies' Initiative 
on Financing Growth in Emerging Markets, and a professor at 
Columbia School of International Public Affairs. He previously 
served as Senior Deputy Comptroller for the OCC.
    Welcome to our witnesses. General Stein, we will start with 
you. Thank you for joining us.

   STATEMENT OF JOSH STEIN, ATTORNEY GENERAL, STATE OF NORTH 
                            CAROLINA

    Mr. Stein. Mr. Chairman and Members of the Committee, my 
name is Josh Stein, Attorney General of North Carolina, and I 
am pleased to have this opportunity to discuss the OCC's so-
called true lender rule. It is more accurate, however, to call 
it the ``fake lender rule'' because predatory lenders dress up 
their loans to try to make them look as though they were made 
by an entity exempt from State usury law, such as a national 
bank regulated by the OCC. If not reversed, this new rule 
provides a get-out-of-jail-free card to predatory lenders who 
violate State laws limiting interest rates and fees on consumer 
loans.
    For nearly 200 years, State and Federal courts, using the 
true lender doctrine, have recognized and outlawed subterfuges 
that put form over substance. This doctrine looks to whether a 
predatory lender retains the predominant economic interest in 
the loan to determine whether the predatory lender is the true 
lender and, therefore, must comply with State rate caps.
    North Carolina has a long history of strong laws and 
vigorous enforcement against unfair consumer lending. For a 
brief experimental period, from 1997 to 2001, North Carolina 
law permitted payday lending. During that time we learned 
firsthand the economic damage these incredibly high-cost loans 
inflict on working families, especially those in neighborhoods 
of color and near military bases.
    The average borrower rolled over more than eight loans at 
419 percent from the same store, and one out of seven borrowers 
took out more than 19 loans per year. These loans were not a 
source of occasional credit as the marketing suggested but, 
rather, a debt merry-go-round borrowers could not get off.
    Anita Monti, a 61-year-old grandmother from Garner, made $9 
an hour working the second shift. She wanted to buy her five 
grandchildren Christmas presents, but she was living paycheck 
to paycheck. She went to an Advance America storefront and 
borrowed $300. In 2 weeks, she did not have the money she owed, 
and her electric bill was due. So she had to renew the $300 
loans. Like so many others, she did this over and over.
    After paying fees every 2 weeks for a year, in all nearly 
$2,000 just to borrow $300. She was only able to repay the 
original loan after earning a raise to $12 an hour and 
scrimping on food.
    Due to the exorbitant interest rates and patterns of 
harmful, repeat borrowing that buried thousands of North 
Carolinians like Anita in debt, North Carolina's Legislature 
allowed this law to sunset in 2001. After the sunset, most 
payday lenders complied and closed their doors. However, 
others, including Advance America and ACE Cash Express, looked 
for ways to circumvent North Carolina law using rent-a-bank 
schemes. The banks' names were placed on the loan documents, 
but the payday lenders marketed, underwrote, assumed the risk, 
claimed the profits, and made the loans at sky-high interest 
rates of up to 521 percent to North Carolina consumers.
    After an enforcement action by the then-North Carolina 
Attorney General, the North Carolina Commissioner of Bankers 
held that the payday lender, despite its rent-a-bank 
subterfuge, was, in fact, the true lender and, therefore, 
subject to State usury law.
    North Carolina is by no means alone in protecting our 
borrowers. Other States have also relied on the true lender 
doctrine to stop payday lenders from using rent-a-bank schemes 
to evade their State interest rate laws. This new rule 
threatens to upend efforts to protect our people. Along with 
seven other Attorneys General, I filed a lawsuit in the 
Southern District of New York challenging the rule, and we are 
confident in our legal position. The congressional review 
process, however, provides a far more straightforward and 
quicker means to reverse the fake lender rule than does 
litigation. That is why a bipartisan group of 25 Attorneys 
General recently urged Congress to disapprove this new rule.
    Protecting our constituents is our highest calling, and I 
am proud to stand up for hardworking North Carolinians like 
Anita. As Senators, you have the authority to help people like 
her all across this country. It is an awesome power, and I ask 
that you exercise it.
    Thank you for your time.
    Chairman Brown. Thank you, General Stein.
    Ms. Stifler, you are recognized for 5 minutes.

STATEMENT OF LISA F. STIFLER, DIRECTOR OF STATE POLICY, CENTER 
                    FOR RESPONSIBLE LENDING

    Ms. Stifler. Good morning, Chairman Brown, Ranking Member 
Toomey, and Members of the Committee. I am Lisa Stifler, 
director of State Policy at the Center for Responsible Lending, 
an affiliate of Self-Help Credit Union. Thank you for the 
opportunity to discuss the single greatest threat to the 
ability of States to protect their residents from payday and 
other high-cost loans.
    With the blessing and facilitation of Federal regulators, 
we are seeing the reemergence of predatory rent-a-bank lending 
schemes. In these schemes a nonbank lender makes loans at rates 
higher than allowed by State law by renting the name and 
charter of a rogue bank that is exempt from State interest rate 
caps, and then the nonbank lender attempts to claim that 
exemption for itself. These partnerships are shams, created 
with the express purpose of skirting State law, and they trap 
consumers in unaffordable loans.
    The OCC's true lender rule will pave the way for more of 
these schemes to proliferate. The rule was hastily proposed and 
then finalized a week before the 2020 election, with the agency 
failing to meaningfully address concerns raised in the more 
than 4,000 comments filed. The rule facilitates rent-a-bank 
schemes just like those used by payday lenders in the early 
2000s until both Federal and State regulators shut them down.
    The rule overturns the decades-long OCC position that these 
sham arrangements are an abuse of the national charter. The OCC 
also ignored the procedural requirements in the Dodd-Frank Act 
established by Congress to prevent this exact kind of regulator 
overreach--the OCC's aggressive preemption of State consumer 
protection laws that precipitated the 2008 financial crisis.
    It is no mystery what happens when these protections are 
removed. The cycle of financial instability caused by high-cost 
lending is the reason States adopted these protections in the 
first place. The harms fall mostly on lower-income working 
families and communities of color. That is why faith leaders, 
community, and civil rights groups across the country are 
united in opposition to this rule as well as Attorneys General 
and State banking regulators from both parties.
    How the OCC's rule will work is already clear, because OCC-
regulated banks are enabling some of the most predatory loans 
on the market. For over a year, Stride Bank has been helping 
the payday lender CURO pilot installment loans at rates as high 
as 179 percent APR for loans up to $5,000. This outrageously 
priced loan is illegal in almost every State, yet the OCC rule 
invites predatory lenders to evade State laws by paying a bank 
to put its name on the paperwork.
    Another OCC-regulated bank, Axos Bank, rents its name and 
charter to the predatory small business lender World Business 
Lenders. WBL Loans run in the tens and even hundreds of 
thousands of dollars and carry rates as high as 268 percent. 
Often secured by the borrower's personal residence, these loans 
are causing small business owners to lose their home.
    The OCC is aware of these sham arrangements, but it has 
taken no public action against the banks and even directly 
supported WBL in court. Clearly, the agency's assurances that 
the rule will not allow harmful loans are belied by these facts 
and the agency's own actions.
    People in communities across the country are reeling from 
the economic impacts of COVID-19. As we look to create a strong 
recovery for all, one way not to help these families is to 
eviscerate State interest rate laws. Congress and the 
prudential regulators should focus on ensuring a fairer 
financial system that serves all consumers rather than creating 
new avenues for predatory lenders to drive consumers further 
away from the financial Main Street. Because Congress has not 
yet enacted a Federal interest rate ceiling, State interest 
rate limits are the only protection against high-cost predatory 
loans.
    This is not a close call or even a complicated issue. The 
OCC's rushed and ill-conceived rule is bad for consumers and 
small businesses, is bad for States' rights, overturns 
centuries of case law, and is antithetical to the goal of an 
inclusive economic recovery. And it is illegal under Federal 
law.
    Simply put, this rule facilitates loans illegal under State 
law, not just any loans but ones reaching 200 and 300 percent 
APR. That is the decision here--siding with illegal lending 
practices or standing up against them. We urge you to stand up 
against them and repeal the OCC rule.
    Thank you, and I look forward to answering your questions.
    Chairman Brown. Thank you, Ms. Stifler.
    Dr. Haynes is recognized for 5 minutes. Welcome to the 
Committee.

  STATEMENT OF REVEREND DR. FREDERICK D. HAYNES, III, SENIOR 
     PASTOR, FRIENDSHIP-WEST BAPTIST CHURCH, DALLAS, TEXAS

    Reverend Haynes. Good morning, Chairman Brown, Ranking 
Member Toomey, and Members of the Committee. I am Frederick 
Douglass Haynes, III. I serve as the pastor of Friendship-West 
Baptist Church, a congregation of 12,000 parishioners in 
Dallas, Texas.
    I am grateful for the opportunity to morally appeal to you 
on behalf of a broad and diverse faith community coalition that 
includes Southern Baptist Convention's Ethics and Religious 
Liberty Commission, the National Association of Evangelicals, 
the National Baptist Convention, and the United States 
Conference of Catholic Bishops--quite a diverse coalition. And 
we are appealing to you because we must stop those who would 
use their greed to exploit those in need through high-cost 
predatory debt traps that we consider usury.
    Faith groups of all traditions representing 118 million 
Americans mobilized to call on the CFPB to enact a strong rule 
addressing the inimical systems of payday lending debt traps. 
We call on you now to stop this harmful rent-a-bank rule. Usury 
and economic exploitation of the poor are condemned in all 
faith traditions. Those who exploit the poor through predatory 
practices are referred to in Scriptures as ``wolves.'' The 
predatory practitioners of rent-a-bank schemes may well be 
referred to as wolves dressed up in the legitimacy of a bank. 
But the victims of such practices testify that an economic 
predator by any other name is still trapping the desperate in 
debt. These ``moral monsters,'' to use the language of James 
Baldwin, feed their greed at the expense of the vulnerable.
    For years we have worked to expose these debt traps clad in 
deceptive wardrobes from the crass neon signs that litter the 
neighborhoods of the needy to the polished promises of fintech 
lenders who claim to be the saviors of families who need access 
to credit. The con, of course, is that the access they impose 
on these families is a deceitful, dead-end debt booby trap, as 
they aim to draw them into a machine calibrated to siphon funds 
from their bank accounts until they have all but bled them dry. 
Many end up filing bankruptcy due to the moral bankruptcy of 
the predatory lenders, who make them pay a high cost for being 
poor.
    I have seen this in my church. I could give you many 
examples, but, quickly, a widowed grandmother paid back $800 
for a $300 loan. Immoral. A young college graduate who worked 
two jobs took out a payday loan as his mother became sick, 
believing it would help him get through the crunch, but an 
interest rate of 450 percent set him up to bring him down 
financially. He ended up losing the car he needed to get to 
work. That is immoral.
    Predatory payday, car title, and installment lenders strip 
billions every year by replicating a dreadful, disadvantageous 
practice and hiring lobbyists to put a halo on their devilment 
for lawmakers and regulators.
    I am appalled by the harm done to those who face historic 
divestment, who are exploited; they suffer from economic 
injustice. These communities were crippled already by 
redlining, and now they are being ripped off by the social 
violence of financial predators. For decades banks used maps to 
deny loans to communities of color, and now through rent-a-bank 
schemes, they are using maps to locate and serve as legalized 
loan sharks of those same communities.
    Payday lenders have an ugly history of setting up shop in 
Black and Brown neighborhoods. We have seen this firsthand in 
the community surrounding our church here in Dallas, and 
research bears it out. Now many are shifting to online loans 
through rent-a-bank schemes and targeting the same struggling 
communities.
    That the OCC would open up our communities to more 
exploitation when we are suffering already so severely from 
COVID-19 is immoral; it is disgraceful that the OCC would give 
predatory lenders a way to charge 200 to 400 percent interest 
and even more, even in States that have fought hard to stop 
this predation with a 36 percent interest rate cap. That is 
indeed obscene, and as we would put it in my faith community, 
it is sinful and demonic.
    We strongly oppose the OCC's plan to enable predatory 
lenders to ignore State interest rate caps. Please understand 
true lending is really false. It is a lie. Jesus said the truth 
will set you free, lies will lock you up. This is not a savior. 
It is the seductive slave master, and we are calling upon you 
to reject this.
    Chairman Brown. Thank you, Dr. Haynes, for your comments.
    Mr. Brooks, you are recognized for 5 minute.

STATEMENT OF BRIAN P. BROOKS, FORMER ACTING COMPTROLLER OF THE 
                            CURRENCY

    Mr. Brooks. Thank you, Chairman Brown, Ranking Member 
Toomey, and Members of the Committee. Thanks for the 
opportunity to discuss the OCC's true lender rule.
    My testimony obviously provides more details, but I did 
want to highlight several issues to help Members better 
understand the rule, what it does and does not do, what it 
achieves, and what the effect would be of overturning the rule.
    So the OCC true lender rule clarifies when a national bank 
or savings association is the true lender of a loan and 
provides a bright line as to when OCC examination and 
enforcement authority applies to ensure compliance with the 
very consumer protection and other legal requirements being 
discussed today associated with these kinds of loans. The rule 
provides a plain language definition that a bank is the true 
lender if, on the date of origination, it is named as the 
lender in the loan agreement or if it funds the loan on that 
date. The rule clarifies that, as the true lender, the bank 
retains the compliance obligations associated with making the 
loan, even if the loan is later sold.
    Rather than a safe harbor, as critics of the rule suggest, 
the rule ensures that the bank faces strict Federal supervision 
for all the compliance considerations for making the loan, 
including, but not limited to, fair lending, consumer 
compliance, sound underwriting, and BSA and anti- money-
laundering regulations.
    The rule actually negates concerns regarding harmful rent-
a-charter arrangements by preventing situations where banks 
make loans on behalf of third parties, as we discuss 
previously, and then walks away from any responsibility for the 
loan.
    In issuing the rule, the agency was acutely sensitive to 
this issue and expressly that it would ``hold banks accountable 
for all loans they make, including those made in the context of 
marketplace lending partnerships or other loan sale 
arrangements.'' Specifically, the OCC emphasized its 
``expectation that all banks [will] establish and maintain 
prudent credit underwriting practices and comply with 
applicable law, even when they partner with third parties.'' If 
not, ``the OCC will not hesitate to use its enforcement 
authority consistent with its longstanding policy and 
practice.'' And as I am sure Committee Members know, the OCC's 
record here is positive, demonstrating significant enforcement 
actions all the way back to the early 2000s that penalize banks 
when they have allowed their charters to be rented out to abuse 
consumers.
    Now, the true lender rule must be understood in context. 
True lender is the third component of a three-component legal 
regime. Component number one of the regime is the principle of 
interest rate exportation. The Supreme Court in its 1978 
Marquette decision and Congress' 1980 enactment of the 
Depository Institutions Deregulation and Monetary Control Act 
allowed both national banks and State banks to export their 
home State's interest rate to customers in other States. This 
principle is not new, nor is it partisan. Marquette was argued 
by Robert Bork but decided by Justice William Brennan on behalf 
of a unanimous Supreme Court. The Monetary Control Act enjoyed 
majority support of both parties and was signed into law by 
President Jimmy Carter.
    Now, the second component of the legal regime of which true 
lender is a part is the ``valid when made'' concept. That 
concept flows from the idea that banks have the ability to sell 
loans to third parties. This is good policy because it allows 
banks to take the money generated by the loan sale and recycle 
that money into the next loan, thus increasing the total supply 
of credit. And economic studies show that when banks are not 
able to do this and their available funds to make loans is 
reduced, the first people to suffer are low- and moderate-
income Americans. Court cases from around the country have held 
that the interest rate on a loan that is valid when made by a 
bank remain valid even after the loan is sold to a third party. 
The exception is the famous Madden decision, and we now know 
the effect Madden.
    In the two States subject to that decision, loans to low- 
to moderate-income Americans fell by 64 percent afterward. And 
why? Because when bank lending is limited to the bank's own 
balance sheet, the bank will first make loans to the safest and 
usually richest borrowers. And when it runs out of lendable 
funds or when it reached borrowers whose market rate of 
interest exceeds the legal rate, it will stop lending. In other 
words, Madden did not reduce the price of credit to those 
borrowers. It reduced the availability of credit to people who 
needed it most.
    Criticism of Madden, again, is not a partisan issue. 
President Obama's Solicitor General advised the Supreme Court 
that the Madden court of appeals ``erred in holding that State 
usury laws may validly prohibit a national bank's assignee from 
enforcing the interest-rate term of a debt assignment that was 
valid under the law of the State in which the national bank is 
located.'' Again, that is the Obama administration's Solicitor 
General speaking.
    Having said all this, the true lender rule does not alter 
States' authority to supervise their own banks or nonbank 
lenders or to define what true lender means for State-chartered 
banks, nor does it alter State authorities to license, 
regulate, and enforce laws applicable to nonbank lenders and 
financial services providers. And I think the States should 
vigorously exercise those authorities regarding those State-
licensed companies.
    I would note that the very payday lenders and others that 
often come in for criticism are State-licensed companies, and 
if the State has serious concerns about them, they are, of 
course, free to revoke their licenses or take other action.
    Senators, the issue here is that the price controls, and I 
would ask you to consider that price controls result in 
shortages.
    Thank you.
    Chairman Brown. Thank you, Mr. Brooks.
    Dr. Calomiris is recognized for 5 minutes. Thank you for 
joining us.

 STATEMENT OF CHARLES W. CALOMIRIS, HENRY KAUFMAN PROFESSOR OF 
        FINANCIAL INSTITUTIONS, COLUMBIA BUSINESS SCHOOL

    Mr. Calomiris. Thank you. Chairman Brown, Ranking Member 
Toomey, Members of the Committee, it is a pleasure to be with 
you today. I request that my written testimony and a supporting 
document that I quote extensively in my testimony be entered 
into the record as well.
    I will explain the economic benefits that arise from 
allowing financial institutions of various kinds to partner 
with each other in providing lending services to their 
customers in the context of an integrated national market for 
loans. A massive amount of evidence has come to light showing 
advantages of an integrated national market for loans that 
permits diverse businesses with different comparative 
advantages to work together in the lending supply chain.
    Recently, a nonpartisan group of 47 leading scholars of 
banking working at America's greatest universities summarized 
this literature in an amicus brief, which was filed in support 
of the OCC's defense of its ``valid when made'' rule and, by 
extension, its true lender rule. My testimony describes that 
consensus, which is remarkably clear and unequivocal.
    The true lender rule clarifies that a bank that originates 
a loan retains the consumer protection obligations related to 
making that loan and whether or not it sells the loan to 
another party. Some State authorities oppose the ``valid when 
made'' and true lender rules to preserve the ability of the 
State to enforce usury laws that limit interest rates on loans.
    If State challenges were upheld in the courts, that would 
wreak havoc on the national market for loan sales. But why does 
that matter to individual consumers? A central insight of the 
amicus brief is that the competitive abilities to originate 
loans, to hold loans, or to perform other services related to 
loans in the supply chain differ across providers. Pooling 
funds and skills in the loan supply chain within an integrated, 
competitive, and innovative national market makes loans cheaper 
for borrowers.
    A quote from the brief: ``If the usury law of the loan 
buyer's State applied to the loan, the market for loan sales 
would be significantly disrupted: an institution in one State 
could legally make the loan but institutions in other States 
may not purchase it with the same pricing. Consequently, the 
integrated secondary market for loan sales would be reduced and 
fragmented across groups of States with similar usury laws. 
Therefore, to preserve a well-functioning market for loan 
sales, the OCC's Rule should be maintained.''
    Low-income risky and small-dollar borrowers would be 
especially harmed if the rule were rejected. ``The expansion of 
lending and lowering of risk made possible by loan sales should 
lead to more financial inclusion and broader access to credit. 
Studies have shown that loan sales reduce the interest rates 
that borrowers pay on their loans and increase the likelihood 
that borrowers will receive a loan. These advantages should, in 
theory, be especially important for small and risky borrowers, 
who are often excluded from receiving loans when credit is 
constrained. Moreover, many innovative new fintech lenders rely 
on loan sales as a means of leveraging their origination 
capabilities, which can carry particular benefits for less 
wealthy or higher-risk borrowers. Limits on the viability of 
the loan sales market would therefore have adverse effects on 
the underserved by limiting their ability to receive lower cost 
loans as well as receive funds through innovative financial 
inclusion intermediaries.''
    But shouldn't we worry that allowing loan sales across 
State lines undermines the effectiveness of usury laws? Is that 
a bad thing? Quoting again from the study, ``Usury rates 
attempt to restrict any potential market power that banks can 
use to disadvantage borrowers. However, usury ceilings also 
could differentially curtail loans to riskier and lower-quality 
borrowers, thus pushing them toward less-regulated types of 
borrowing. Empirical research quite broadly supports the notion 
that the latter effect dominates: that riskier-looking 
borrowers (who are often minorities or others with limited 
financial access) are hurt when usury ceilings are binding and 
benefited when they are loosened or eliminated.''
    I will close with two of my observations. Advocates of 
usury laws point to borrowers' lack of information as a 
rationale for usury laws. A borrower could qualify perhaps for 
a loan at 8 percent, but may not be aware of that, and a lender 
might trick him or her into agreeing to a much higher interest 
rate. This sort of trickery is possible when loan markets lack 
competition and when borrowers lack information about their own 
credit risk. As the appendix to my testimony shows, the role of 
new fintech entrants, who should not be confused with payday 
lenders--in fact, they are the competition of payday lenders. 
As the appendix shows, the role of new fintech entrants in 
strengthening competition and empowering borrowers with new 
sources of information are precisely the reasons that fintech 
firms are making important contributions to financial 
inclusion.
    I will stop there. Thank you very much.
    Chairman Brown. Thank you, Dr. Calomiris, for your 
testimony.
    I will begin the questions and then turn to Senator Toomey. 
I will start with Dr. Haynes, Dr. Frederick Douglass Haynes. 
You are testifying today as part of a broad coalition of faith-
based institutions working to end predatory lending, as you 
made clear. These institutions politically certainly differ all 
across the political spectrum. Why are they united in this work 
to end predatory lending and opposed to the true lender rule?
    Reverend Haynes. Well, because of the fact that across all 
faith traditions, you know, usury is condemned. Economically 
exploiting those who are already vulnerable, those practices 
are condemned. In both the Hebrew Bible as well as the Greek 
New Testament, usury is condemned. Jesus overturned the money 
tables that may well be fintech or payday loan scores of his 
day. The Hebrew Bible repeatedly warns against usury, so this 
is something that we are joined together because morally we all 
agree that usury is wrong. Morally we all agree that 
exploitation of the poor is something that God frowns upon. And 
so that is why, again, though we may be ideologically and 
politically different, we all agree morally that usury damages 
any community.
    Chairman Brown. Thank you, Dr. Haynes.
    Ms. Stifler, how is the true lender rule from the OCC 
different from how the agency approached rent-a-bank schemes 
under the Bush administration?
    Mr. Stein. Thank you for asking this question, Senator 
Brown. This rule, the OCC's rule, is a 180-degree change in 
policy. Under the Bush administration, the OCC emphasized that 
preemption was an inalienable right of the bank itself. It 
looked at rent-a-bank schemes and said that preemption is not 
like excess office space in a bank-owned office building that 
the bank can just rent out. So it shut the schemes down.
    The OCC then finalized the true lender rule by absolute 
contrast, laid out a welcome mat to predatory lenders, and 
said, ``Here is your preemption.'' Put another way, the OCC 
under the Bush administration looked at the substance of the 
transaction just as courts have done for hundreds of years, and 
the OCC that issued this rule prioritized what is on a form on 
a piece of paper, even if that is a sham.
    Chairman Brown. So do you think the Bush era OCC would have 
shut down this rent-a-bank scheme if the new true lender rule 
had been in place?
    Mr. Stein. No, not the ones that we saw back in the 2000s, 
the ones that General Stein talked about that North Carolina 
and other States shut down. What we saw in those was that on 
the paperwork all that was required was a name on the loan, and 
that is what we saw in the early 2000s. So even though from the 
consumer perspective they might walk into the payday loan 
store, say Advance America, they got the loan at the Advance 
America store, they made payments to Advance America, they 
dealt with the collection attempts from Advance America, and 
were sued by Advance America because the bank's name--in this 
case it was People's National Bank--was on the loan document 
under this rule that would have been sufficient and would not 
have been shut down. It would have been allowed.
    So, yeah, the schemes in the 1990s and 2000s would not have 
been shut down like they did.
    Chairman Brown. Thank you for that.
    General Stein, the OCC claims the true lender rule does not 
limit States' ability to regulate payday and other nonbank 
lenders. You testified, in fact, the rule preempts State law, 
takes away your authority to shut down rent-a-bank schemes that 
are targeting residents in your State of North Carolina. Can 
you explain why?
    Mr. Stein. Yes, the reason we succeeded in North Carolina 
in running the payday lenders out in 2004 and 2005 was because 
we brought a case to the Commissioner of Banks, and they 
concluded that the predominant economic interest of those loans 
was the payday lenders. Their relationship, the payday lenders' 
relationship with the banks, the national banks, was simply 
paying them for use of their logo on the bank application form, 
on the loan application form.
    If the true lender rule, as presented by the OCC, takes 
full effect and is not repealed by Congress, the exact same 
relationship that we successfully defeated and ran out of North 
Carolina, it will be challenging for us to win such a case in 
the future. And this decision about what is in the interest of 
North Carolina consumers, I am sorry, is not for the OCC to 
make. It is for the people of North Carolina through their 
State elected representatives, it is their decision to make. 
And we have made that decision. I have heard a couple of people 
testifying that there is a concern about shortage of credit. We 
want a shortage of high-cost, illegal, harmful loans. That is a 
good thing and a decision that we as a State have made.
    Chairman Brown. Thank you, General Stein.
    Senator Toomey is recognized.
    Senator Toomey. Thank you, Mr. Chairman.
    Let me go to Mr. Brooks. it seems to me one of the 
principal virtues of the true lender rule is that it creates a 
clear rule, provides certainty in advance about who is 
responsible for a loan when banks and nonbanks partner to make 
the loan. Could you just tell us, why is that important? Why is 
it important for market participants to have that regulatory 
certainty? And what would the effect be if this rule gets 
repealed and there is no certainty?
    Mr. Brooks. Well, Senator Toomey, I really appreciate the 
question. The certainty that is most important here under the 
true lender rule has to do with the certainty of the interest 
rate enforceability, OK? So the question is: Should banks 
invest dollars in lending to low- and moderate-income people 
whose risk profile necessitates a somewhat higher interest rate 
for the loan to be valid and profitable?
    If the bank is not sure or if the markets are not sure 
whether that interest rate will be valid when that loan is sold 
into a credit card securitization or sold into a personal loan 
securitization, the market will not invest in that, which means 
that those loans go away. And I cannot emphasize this too much. 
It is not that the loans become cheaper. It is that the loans 
go away. And I think General Stein's comment that there are 
people out there who actually want those loans to go away is an 
interesting sort of lens into the way to think about this----
    Senator Toomey. Let me just--I mean, the idea that we 
should forbid people from having access to loans because they 
cannot be trusted to make a good decision for themselves, does 
that strike you as a little bit patronizing and condescending?
    Mr. Brooks. Well, you know, Senator, I guess I would 
hesitate to make characterizations of other people who I 
respect, but, look, our thought at the----
    Senator Toomey. I am talking about the idea.
    Mr. Brooks. Yeah. The idea is not consistent with the 
concept of a pluralistic, capitalist democracy. Personally, I 
took our relatively high interest rate student loans that were 
not tax deductible that today people would find shocking. That 
is what allowed me to get my life on track from a low-income 
small town in southern Colorado. And so I do not look at 
interest as a bad thing. If I am someone who has dings on my 
credit and I need a 2-year personal loan to replace my roof or 
do one of the many things that people use these loans for, I do 
not think it is up to me to say that is a bad thing.
    Senator Toomey. Yeah, it might be OK for the consumer to be 
able to make that decision.
    Mr. Brooks. Right.
    Senator Toomey. Some have suggested that the true lender 
rule creates a new legal regime that effectively revokes State 
usury laws and allows nonbank lenders to issue these loans that 
are not subject to regulatory oversight, so both of these 
things. But as I think you mentioned in your comments, for many 
decades, both federally and State-chartered banks have had the 
legal authority--and it really has not been very 
controversial--to export their interest rates.
    So does the rule really have the effect of undermining 
States' rights? And what about this claim that somehow it 
creates a regulatory wasteland where these loans are just not 
subject to regulation?
    Mr. Brooks. Yeah, so, Senator, there is a lot there, but I 
would just say, first of all, the concept is not new. As I say, 
you know, Justice Brennan, no less, writing for a unanimous 
Supreme Court, upheld the principle of rate exportation. 
President Jimmy Carter upheld that right for State banks as 
well. And so to be clear, the idea that a rate of interest can 
be charged that is higher than the borrower's home State rate 
has been the law of the land since 1978. There is nothing new 
about that, and that was supported by broad, bipartisan 
majorities of both parties.
    In terms of the regulatory wasteland, there are two points 
to understand here. First of all, these predatory lenders, the 
people you are talking about, are State-licensed entities. Let 
me repeat that. They are State-licensed entities, and a State 
is absolutely free to yank the license of any of those kinds of 
companies that it wants to, and it should if it thinks that 
consumer abuses are going on.
    The point of the rule, however, is simply to make clear 
that banks can leverage their balance sheet through loan sales 
to make more credit available to more people. If that principle 
is debatable, I think someone should stand up and debate it. 
But if the idea is Advance America's, they should have their 
licenses yanked by the State who licensed them.
    Senator Toomey. Thanks. Just quickly, Professor Calomiris, 
you know, I think somebody clearly indicated that their concern 
with the true lender rule is that if it were overturned, it 
would subject some number of additional loans to State price 
caps in the view that price controls are good for consumers. Is 
it your view that price controls are good for consumers and 
that that is what we ought to seek? I think your mic is off.
    Mr. Calomiris. Oh, somebody--is it on now?
    Senator Toomey. Now it is, yes.
    Mr. Calomiris. The evidence which I summarized in my 
statement clearly shows that usury laws are bad for consumers, 
that they limit credit availability for consumers, especially 
for low-income and small borrowers and high-risk borrowers. So 
there is no question about that. That is not just my opinion. 
That is the entire economic literature.
    What I would also point out is that the opportunity that I 
think all of us have in our minds that we would like to see, 
borrowers who can qualify for lower interest rate loans not be 
tricked into high interest rate loans. I think that is a valid 
issue. And what I want to point out, I hope everyone will just 
take a few minutes to read my 5-page appendix, on what is going 
on right now in financial inclusion and protecting consumers 
coming from these fintech bank partnerships. It is really 
exciting. It is quite impressive. It has absolutely nothing to 
do with payday lending except that it is an alternative to 
payday lending, and it is steering low-income and low-dollar 
borrowers to much lower interest rates. That is what is at 
stake here.
    So I think we have a pretty severe mischaracterization of 
these very flexible and innovative new partnerships that are 
really empowering consumers in new ways, and I give many 
examples in my testimony. Since I wrote my testimony, some 
people have actually come to me and said, ``Hey, you left me 
out. I am a firm that is doing this, too.'' So it is actually a 
very broad-based and exciting new movement, and I hope we do 
not, in some misguided attempt to thwart something, undermine 
this progress.
    Senator Toomey. Thanks very much.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Toomey.
    Senator Reed from Rhode Island is recognized for 5 minutes.
    Senator Reed. Thank you, and let me direct my question to 
Attorney General Stein. There has been a recurring discussion 
about the effect of interest rate caps, usury laws on 
unintended consequences, and restricting credit. I think in 
North Carolina you actually have some real evidence of what 
happens when a law is impose and then again when it is taken 
off. Could you comment on that, General?
    Mr. Stein. I would be happy to, Senator Reed. Thank you. 
Yeah, we actually are a bit of an experiment. I guess that is 
how federalism is supposed to work. We authorized it, and then 
we took away that authorization. And there was an extensive 
study done by UNC after the law went away surveying low-income 
households and universally needed credit. And the conclusion of 
the survey was that the absence of storefront payday lending 
did not have a meaningful impact on availability of credit to 
households in need because there were an array of other options 
available to them.
    In fact, when they asked the households what they thought, 
90 percent of them said that they thought payday lending was a 
bad thing. And of the universe of those households that had 
taken out payday loans in the past, by more than a 2:1 ratio, 
they said these were bad things, not good things; that they 
were incredibly easy to get into because of the marketing and 
ease, but incredibly difficult to get out of.
    And so, yes, there are alternatives to credit, alternative 
credit options to people that are not exploitative, and that is 
much better.
    Senator Reed. Thank you very much, General.
    Ms. Stifler and Dr. Haynes, we have been talking about sort 
of the direct course and repayment of these loans with high 
interest, but we are working with Chairman Brown and others to 
pass the Military Lending Act, which has a 36-percent cap on 
loans. And when the Department of Defense was finalizing its 
rules, they pointed out there are associated costs to the 
payday lending. People sort of literally lost their jobs 
because they became insolvent and they were discharged, and the 
discharge cost additional money.
    So could you perhaps talk about some of the nonmonetary 
costs that have been incurred because of predatory loans? 
First, Ms. Stifler.
    Ms. Stifler. Thank you, Senator Reed. I would be happy to. 
So there are payday and other high-cost loans that are 
associated with a cascade of long-lasting financial 
consequences. They include bankruptcy, insufficient fund fees, 
other bank penalty fees, and often being shut out of the 
banking financial mainstream because of bank account closures. 
Borrowers who take out car title loans often lose their cars to 
repossession and are unable to get to work and are at risk of 
losing their jobs. A lot of the debt associated with high-cost 
loans come with health consequences due to stressors of being 
in debt. And for small business borrowers, they deal with 
harassment, bank fees, bankruptcy, loss of their business, and 
often loss of personal homes.
    So those are just some of the other additional harms, and I 
am sure Dr. Haynes has some personal stories that he can bring 
to bear.
    Senator Reed. Thank you. Doctor.
    Reverend Haynes. Right, and I will just add that the attack 
on the mental health of those who find themselves stressed out 
because they cannot, again, pay off the loans, and their 
economic situation not only spirals downward and they find 
themselves again stressed, but there are so many other 
ramifications, it is almost a domino effect of consequences. So 
when you move from the mental health, not only to mental 
health, but then the families, I have literally seen families 
fall apart because they could not handle the stress of having 
been put in the debt trap that they found themselves in.
    And so mental health as well as families falling apart are 
just two examples of the cascading effect of these predators.
    Senator Reed. Thank you very much. I am not aware of my 
time, Mr. Chairman. I have one other question.
    Chairman Brown. Certainly. Proceed, Senator Reed. Go ahead.
    Senator Reed. Ms. Stifler, you said in your written 
testimony, ``predatory lending is fundamentally, structurally 
different than responsible lending. High-cost lending turns 
incentives on their head, so that lenders succeed when 
borrowers fail.'' Could you explain that?
    Ms. Stifler. Certainly. With reasonably priced loans, 
lenders only succeed when borrowers are able to repay the 
principal. But with high-cost loans, this is not the case. So 
with a high-cost installment loan like many in these rent-a-
bank schemes that we are seeing, the high interest rates slow 
down the repayment of principal so much that the borrower can 
pay for months or even years without making virtually any dent 
in the principal. But the borrower has paid so much in interest 
alone by then that the lender who has already reached a profit 
on the loan without the borrower's principal balance decreasing 
at all.
    There are examples. For example, in Maryland, a borrower 
took out a $2,000 installment loan with Opportunity Financial, 
also known as OppLoans, that is offered through a rent-a-bank 
scheme that the District of Columbia Attorney General was suing 
for their rent-a-bank scheme. And after more than a year of 
paying on that loan, the borrower reported having paid $4,600, 
and the principal, the $2,000 loan had not decreased at all.
    So this is an example of how truly unaffordable loans can 
get you stuck in the debt trap, and the flip of what affordable 
loans do for borrowers as they are actually paid off.
    Senator Reed. Thank you.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Reed.
    Senator Tillis of North Carolina is recognized for 5 
minutes.
    Senator Tillis. Thank you, Mr. Chairman. And a special 
welcome to General Stein. It is good to see you. We spent time 
in the legislature together.
    I first have to go back to my time. When I was 13 years 
old, I knew what a 90-day note was because that is what my dad 
got back when we had personal banking relationships, and some 
of the larger banks or regional banks were willing to take a 
risk on somebody who had no guaranteed income stream. I did 
construction work for him. He would get a project from 
insurance damage. He would go to the bank, get a 90-day note 
with the understanding that we could probably get it done in 60 
days and pay it off.
    Nowadays, you virtually have no personal banking 
relationship with the large banks, particularly for somebody 
like my father who had six mouths to feed, and I would argue 
probably a relatively high-risk profile. Fortunately for him, 
he was able to pay them off.
    But, Mr. Brooks and Mr. Calomiris, it seems like those days 
are gone from most of the large banking institutions, so I am 
worried--when I was in the legislature, invariably when we 
would have a discussion about shutting down some of these 
higher interest rates, higher-risk loans, the caucus that came 
to me first was the African-American communities that the lower 
interest loans were not going to be available to them, and so 
they were more likely to go off the books and get loans from 
people who were far more predatory because they escaped any 
regulatory oversight. Do you agree with that opinion, if we are 
not careful with the policies moving forward with the OCC rule?
    Mr. Brooks. So, Senator, I will kick it off, if I might, 
and thank you for the question. I would say the whole point of 
the work that the OCC did over the last year, starting with the 
small-dollar lending guidance and culminating in true lender, 
was to get banks more involved in this market so that we had to 
rely less on nonbanks. I do find it a little bit puzzling why 
we are spending so much time talking about payday lending when 
I do not think the OCC is ever likely to endorse a payday 
lending arrangement at all. What we are really talking about is 
the personal loan market, the market where fintechs now have a 
larger market share than banks do because banks have left that 
segment. And that market is all about people like your dad. We 
are talking about $5,000 to $15,000 balance loans that do not 
have a 2-week repayment and are not refinanced a hundred times. 
We are mostly talking about installment loans that have, you 
know, a 90-day to 2-year repayment period at interest rates 
that range from 20 to 50 percent. That is sort of the core of 
what that market is, and it is all about your dad. Banks 
stopped making those loans a long time ago because of 
consolidation. The question is: How can we get supervised 
entities back in the market to do that in a way that holds 
somebody accountable? That is the point.
    Senator Tillis. Mr. Calomiris, I want to go to you, but I 
would also like you all to add to our talk again. I think 
Senator Toomey spoke about this. We just want to get rid of all 
these high-interest loans. When we do that, the inference you 
could draw from that, somebody who is watching this hearing, it 
is because there is going to be a plethora of low-interest 
loans for that same base. So if you can respond to my first 
question and add color to that, then, Mr. Brooks, we will go 
back to you.
    Mr. Calomiris. Well, I want to answer both your questions. 
First, the answer is that, yes, the economics literature has 
shown--and both the amicus brief and in my testimony, it says 
so--that the people who suffer from these very binding usury 
ceilings are lower-income, small-dollar, and higher-risk 
borrowers, absolutely. That is the evidence very clearly.
    And what is really exciting--and I want to be more 
positive. What is so exciting is that what we are seeing with 
these fintech providers who are partnering with banks in the 
loan supply chain is that they are actually helping to bring 
more credit at lower interest rates and that they are not just 
doing that by providing capital, but they are also providing 
education, different language consultation services. They are 
making sure people are not tricked. And this is really helpful.
    So characterizing this as payday lending is just completely 
false. As Mr. Brooks said, this is not about payday lending. 
The OCC is not involved in payday lending or sanctioning. This 
is about broadening the base of access for consumers, and that 
is really where the discussion should be focused. I hope people 
will read my appendix, give a little bit more of a sense of the 
richness of what is going on right now.
    Senator Tillis. Well, I thank you both for your responses. 
I may have a couple of questions for the record.
    Look, there is no question that there are predatory lenders 
out there, and there is no question--that is why I supported 
financial literacy initiatives when I was Speaker of the House 
in North Carolina--that we need to make everybody aware of 
their lowest-cost option for financing. Count me in for doing 
that. But removing this for the dads of today who are trying to 
get that short-term loan to put food on the table for six kids, 
count me out of that.
    Thank you, Mr. Chair.
    Chairman Brown. Thank you, Senator Tillis.
    Senator Warren of Massachusetts is recognized for 5 
minutes.
    Senator Warren. Thank you, Mr. Chairman.
    So in our legal system, States set interest rate caps, 
determining what interest rates constitute usury. If I lend to 
my neighbor in Massachusetts, our interest rate will be capped 
at the Massachusetts maximum, which is 20 percent.
    The idea of protecting borrowers from usury dates back to 
the Code of Hammurabi, to the Bible, to the Koran, to every 
colony in prerevolutionary America, and to every State in the 
United States. In 1979, the Supreme Court took that away, 
opening a loophole to let federally chartered banks escape 
centuries of usury laws. And then over time, banks figured out 
that they could open that loophole even wider through the so-
called rent-a-bank scheme.
    Now, under this arrangement, a nonbank lender like an 
online lender or payday loan company that would usually be 
subject to usury laws finds a bank that is willing to originate 
a loan on its behalf and funnels the loan through the bank and 
avoids State interest rate caps. That means that instead of 
interest rate caps like 20 percent, which the State legislature 
determined, interest rates can go to 35 percent or 400 percent 
or 1,000 percent.
    Last year, the OCC issued a rule clarifying who is entitled 
to the usury exemption in cases like these.
    Mr. Brooks, you were Acting Comptroller when the OCC's true 
lender rule was finalized. The rule acknowledges that rent-a-
bank schemes have, and I am going to quote you here, ``no place 
in the Federal financial system.'' Is that your personal view 
as well?
    Mr. Brooks. Oh, absolutely.
    Senator Warren. Good. It is mine, too. So let us take a 
look at what the rule you pushed through actually allows. Mr. 
Brooks, under your rule, if a payday lender arranges a loan for 
a consumer, it is subject to State usury laws. But under the 
OCC's new rule, if that same payday lender arranges for a bank 
to originate the loan and then the payday lender immediately 
buys the loan back from the bank to collect the payments, the 
bank would be considered the true lender so long as it was 
named in the loan agreement, and that loan would be exempt from 
the State's usury laws under this rule from the OCC. Is that 
correct?
    Mr. Brooks. If the bank is named as the lender, so the 
consumer is told that that is their lender, or if the bank 
funds the loan, then, right, the bank is expected to treat that 
as though it is its own loan for underwriting, consumer 
protection, and all purposes.
    Senator Warren. And because banks have an exemption from 
State usury caps, there would essentially be no limit as to 
what the payday lender could charge a borrower if it just 
funnels its loan through a bank. So could it be 20 percent or 
35 percent or 400 percent or 1,000 percent?
    Mr. Brooks. Well, Senator Warren, I disagree with the 
premise, because in the example we are talking about, it is not 
that the payday lender is charging a rate. It is that the bank 
is charging a rate, which means the bank has to assess ability 
to repay. They have to assess fair lending and everything else. 
It is not that the payday lender is originating. It is that the 
bank is originating subject to supervision.
    Senator Warren. Well, I see what you are trying to do with 
the language about who is originating. I understand that the 
payday lender has gotten the bank to put its name on the paper. 
But my question is: If it is the payday lender who finds the 
customer, who has the whole idea, who puts this together, but 
gets the bank to put its name on the paper, will that loan be 
subject to usury laws? It is a pretty straightforward question.
    Mr. Brooks. I think, Senator Warren, it is the preamble to 
the question that is not straightforward, because the preamble 
assumes that the bank would originate a payday loan with all 
that implies, with the likelihood of refinance, with the likely 
inability to repay. Banks are not allowed to do that. The whole 
point----
    Senator Warren. Well, let me just stop you right there, 
just because I want to be clear on this. The new rule you have 
put in place says let us look at the paperwork, and if the 
bank's name is on the paper, that is what is going to control.
    Now, I realize that you want to talk about the additional 
other places that there are rules and regulations governing the 
behavior of the banks. So the OCC is going to let payday 
lenders get an exemption from usury laws, but the OCC is going 
to continue to take enforcement actions when the bank 
originates a loan if it does not consider, for example, the 
borrower's ability to pay. In other words, I think what you are 
saying to me is the OCC will be tough on banks. Is that right?
    Mr. Brooks. Well, there is a lot that you said that I 
disagree with, but, yes, the OCC's history of being tough on 
banks in non-ability-to-repay circumstances is pretty well 
demonstrated.
    Senator Warren. If the Chair will just indulge me for a 
minute here, I want to look at the OCC's history on how tough 
you have been. Let me just look at an example from 
Massachusetts, and that is, in 2018, Axos Bank rented itself 
out to a nonbank company called World Business Leaders to lend 
to a Massachusetts small business at 92 percent interest, which 
is well above our Commonwealth's usury cap of 20 percent. The 
company arranged the loan, set the terms, collected the 
payments, but the name Axos Bank was on the loan document.
    So let me just ask you, Mr. Brooks, this one will be a 
really short question. How many enforcement actions has the OCC 
taken against Axos Bank in recent years?
    Mr. Brooks. It is a great question, but we did not have the 
true lender rule in 2018, which is sort of the point.
    Senator Warren. So how many enforcement actions did you 
take? Because all the rest of the rules were still in place.
    Mr. Brooks. Senator Warren, I personally imposed more than 
$1 billion in penalties----
    Senator Warren. So how many--it is a really straightforward 
question. I have got one bank charging 92 percent interest. How 
many enforcement actions did you take? There is a word you do 
not want to have to say here.
    Mr. Brooks. I am not sure.
    Senator Warren. Zero. None. Under the previous 
Administration, banking regulators wrote rules the way the 
banking industry wanted, created loophole after loophole for 
bad actors, and put the interests of the wealthy and the 
powerful ahead of families and small businesses. We are going 
to have a chance to vote on this in the Congressional Review 
Act resolution to nullify the true lender rule, and I very much 
hope that we pass that and undo the damage that the Trump-
appointed regulators have done.
    Thank you, Mr. Chairman, and thank you for your indulgence 
on time.
    Chairman Brown. Thank you, Senator Warren.
    Senator Cortez Masto is recognized for 5 minutes.
    Senator Cortez Masto. Thank you, Mr. Chairman, and thank 
you to the panel. I so appreciate the conversation today. It is 
just so important.
    Mr. Brooks, let me ask you this: Some nonbank lenders have 
openly acknowledged that they are funneling their loans through 
banks to evade State interest rate caps. Isn't that true?
    Mr. Brooks. If there is a nonbank lender that said any of 
those words, I would be very, very surprised.
    Senator Cortez Masto. Well, they have. So as the regulator, 
doesn't that concern you? As a former regulator, shouldn't that 
concern you?
    Mr. Brooks. Yeah, so, Senator, I am not aware of anyone who 
has publicly said they are either funneling or----
    Senator Cortez Masto. I understand. I am telling you they 
have, and so I appreciate that, but as somebody that now is 
making you aware of it, I would assume--maybe I should not 
assume--that you should be concerned about it. And isn't it 
true that the FDIC has not proposed any similar rule?
    Mr. Brooks. Well, that is not quite right. So as I said, 
there are three laws that work together. They are all 
integrally related. So there is the interest rate exportation 
rule, which I do not think anybody is questioning. There is the 
``valid when made'' rule, which really is what this whole 
discussion has been about today, because this really has not 
been about true lender; it has been about whether a bank can 
sell a loan to a nonbank and have the interest rate travel. And 
the FDIC did adopt that rule around the same time the OCC 
adopted it.
    Senator Cortez Masto. So let me ask you this, let me ask 
you this, because you are going to talk it to death. And I 
appreciate that. Listen, I have listened and I appreciate that. 
But as a former Attorney General, I have to be concerned about 
those individuals who are out there that literally are using it 
to skirt around State laws. You know that. We know that. It is 
happening. And I appreciate where you are coming from because 
you were the Comptroller, Acting Comptroller, when this law was 
passed.
    Let me ask Attorney General Stein, based on this new rule 
that banks' names on paper control and the example that Senator 
Warren just gave to Mr. Brooks, how would that affect your 
ability to challenge a payday lender and a bank who is skirting 
your State interest rate caps? Would it make it more difficult 
to challenge that arrangement and protect your constituents in 
your State?
    Mr. Stein. Thank you, Senator Cortez Masto. Absolutely. 
This is a perfect example of the OCC trying to preempt States' 
ability to protect their people from unlawful, high-cost, 
harmful loan products. Now, ask yourself: These third-party 
lenders, are they doing these relationships with national banks 
in States that do not have interest rate caps? No. They will 
only enter into these relationships with national banks because 
they have to take a slice of their fee to pay the bank for use 
of the logo on their application form. They do not want to do 
it if they do not have to. They only will do that in States 
like North Carolina, like Massachusetts, like Pennsylvania, 
where the State legislatures have made the determination that 
they want to protect their people. And the OCC will make it 
much more difficult for us to enforce State law against those 
types of subterfuges.
    Senator Cortez Masto. Thank you. And let me just say, in 
the FDIC's 2019 How America Banks survey, 5.7 percent of Nevada 
households had taken out a payday loan. That is the highest in 
the Nation. And according to the Center for Responsible 
Lending, the typical annualized percentage interest on a payday 
loan in Nevada is 652 percent. Now, our State legislature has 
taken steps to regulate payday lending, including the 
development of a data base tracking payday loans.
    Ms. Stifler, let me ask you this: Would the OCC's new rule 
undercut Nevada's ability to track those loans to consumers or 
even challenge the State from taking future action to limit 
predatory lending?
    Ms. Stifler. Thank you for that question, Senator. Yes, 
this rule will impede Nevada's ability to track loans and also 
in the future to set interest rate limits. But one thing I want 
to clear up around confusion that is happening around why we 
are talking about payday loans. It is because payday lenders 
are engaging in these schemes right now, online and in stores. 
Just as Mr. Calomiris--sorry if I am pronouncing that wrong--
has found fintech companies engaging in good behavior, we have 
been finding daily payday lenders and other high-cost lenders 
engaging in online and in-store behavior. Check into Cash, one 
of the frequent users of rent-a-bank schemes in the 2000s, is 
using the scheme again in States like Ohio, Arizona, Virginia, 
Nebraska, and California, States that have capped rates in 
recent years on payday and other high-cost installment loans 
and are doing it in-store and online.
    Senator Cortez Masto. Thank you. I know my time is up. 
Thank you so much, Chairman Brown, for this great conversation 
today.
    Chairman Brown. Thank you, Senator Cortez Masto.
    Senator Van Hollen is recognized for 5 minutes.
    Senator Van Hollen. Well, thank you, Mr. Chairman, and 
thank you for holding this important hearing. Thank you to all 
the witnesses.
    As we have heard, this new so-called true lender rule 
really just opens up the floodgates to rent-a-banks and 
predatory lending. I do hope that Congress will muster the 
votes to overturn it.
    In my State of Maryland, we have laws in place to try to 
prevent predatory lenders so they cannot take advantage of 
consumers. Under our State law, the maximum interest rate on a 
$1,000 loan is 33 percent; on a $2,000 loan it is 24 percent; 
on a loan greater than $2,000, it is 24 percent. And yet 
through these rent-a-bank schemes, predatory lenders can 
essentially evade these caps, launder high-interest-rate loans, 
and we are talking about rates 179 percent or higher, and they 
can do this just by having a rubber stamp partnership with 
these banks, as has been described.
    Ms. Stifler, you started to talk about this in response to 
Senator Cortez Masto's question, but from your research, have 
you seen this resurgence of rent-a-bank schemes? If so, how are 
they the same or how are they different from what we saw in the 
early 2000s when the OCC and State Attorneys General shut them 
down? If you could just go into detail, because some claim that 
we are not seeing these problems.
    Ms. Stifler. Thank you for the question, Senator Van 
Hollen. Yes, we are seeing a reemergence of rent-a-bank 
schemes. There have been some rogue banks renting out their 
charters over the past few years with a handful of schemes, but 
increasingly we are seeing more and more of these schemes 
emerging, thanks to the OCC and FDIC recent actions over the 
past couple of years. Today's schemes are fundamentally the 
same as in the 2000s, early 2000s. The nonbank handled 
virtually all of the loan functions, but the bank's name is on 
the paperwork as the lender in order to try to get around State 
law. Shortly after origination, the nonbank lender buys the 
bulk of the financial interest in the loan from the bank, and, 
you know, while some of today's schemes might be dressed up a 
little bit fancier with a fintech aura than the older schemes, 
they still have the same rent-a-back evasion.
    The loans we are seeing are still extremely high cost and 
extremely predatory. They are made by payday lenders. They may 
not be the 2-week loans that perhaps Mr. Brooks is thinking of, 
but they are the 18-month loans at $5,000. They are offered in 
stores and online, like I mentioned, and, you know, they are 
growing. They are also point-of-sale loans, they are car title 
loans, and they are high-cost loans that in 45 States plus the 
District of Columbia are not legal right now.
    Senator Van Hollen. Well, thank you. And, Mr. Stein, just 
to follow up on that--and thank you for bring the legal actions 
that you are on the grounds of preemption, that this rule 
preempts State law and violates the criteria that need to be 
applied for any kind of preemption. From your perspective and 
the perspective of the States, what has been the experience 
with the OCC's preempting State consumer protection laws in the 
past? And are there parallels between what is happening now and 
what happened in the early 2000s that contributed to the 
meltdown?
    Mr. Stein. Thank you, Senator Van Hollen. A great question. 
This is not the OCC's first gambit at trying to keep States 
from looking out for their borrowers. North Carolina was the 
first State in the country to pass an antipredatory lending law 
back in 1998, and then a number of other States followed. And 
these were laws that required an analysis of a borrower's 
ability to repay, a prohibition on flipping loans to charge 
unnecessary fees, negative amortization--all these things that 
led to a surge in dangerous, high-cost, subprime loans 
throughout the early 2000s.
    We fought back against their preemptive moves, but the 
damage was done, and we all lived through the painful Great 
Recession that was really sparked by the meltdown of subprime 
mortgage lending. That is why you all passed the Dodd-Frank 
Act, and that is why you all put restrictions on the OCC's 
ability to preempt States, because you had seen that negative 
experience.
    The OCC is currently flouting the dictates of Congress by 
failing to engage in the preemption requirement you imposed on 
them, and that is why we urge you all to exercise your 
authority under the Congressional Review Act.
    Senator Van Hollen. Well, thank you, and I hope we will. 
And as you know, Senator Brown and I have filed exactly that 
proposal for Congress to act to overturn it. Thank you very 
much, all of you, for your testimony.
    Thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Van Hollen.
    Senator Smith, thank you for allowing Senator Warnock to go 
next. I really appreciate that, as I am sure he does, because 
he has got somewhere he needs to go. Senator Warnock from 
Georgia is recognized for 5 minutes.
    Senator Warnock. Thank you so very much, Mr. Chairman.
    As Chair of the Subcommittee on Financial Institutions and 
Consumer Protection, I am very concerned about this issue. And 
I want to make it very clear that I am going to do everything I 
can to protect consumers, but especially the most marginalized. 
Vulnerable people are the ones who are targeted by these loans. 
And this so-called true lender rule, what a misnomer. There is 
nothing true about it. It provides an avenue for predatory 
lenders to partner with banks to peddle harmful short-term 
loans with triple-digit interest rates--triple-digit--in States 
that have reasonable and often voter approved caps like North 
Carolina on interest rates to protect consumers.
    Today nearly 16,000 payday and auto loan stores operate 
nationwide. I have seen this up close and firsthand as a pastor 
in the Auburn Avenue community in Atlanta, Georgia, and in 
other pastorates.
    Pastor Haynes, let me begin with you. We have worked on 
these issues for years, and I know of your involvement and 
advocacy, and we often talk about financial predators who take 
advantage of the poor, our most vulnerable sisters and 
brothers. In your testimony you shared some of these lived 
experiences of many who attend your church, which is 
predominantly African-American. Could you briefly talk about 
how these rent-a-bank arrangements are affecting both older and 
younger generations at Friendship-West Church and in the 
surrounding communities? And what do you think of the long-term 
economic and wealth consequences for the consumer?
    Reverend Haynes. Thank you for the question, Senator 
Warnock. As you know, usury is un-Biblical, it is immoral, and 
the reason is because of the damage it does to those who are 
already economically vulnerable. In the area where I am blessed 
to pastor, sadly, within a 3-mile radius you have in excess of 
20 payday loan and car title loan stores. At the same time, we 
have seen banks vacate that area, and so the payday and car 
title loan stores become the options that persons have in order 
to make up for being in an underserved area. And, of course, 
they find themselves in a debt trap, and that debt trap does so 
much damage to the community. It does damage to the family, and 
the bottom line is that we are talking about those who are 
already vulnerable who live in a community that is underserved 
and suffers from being disinvested. And so when you combine all 
of that--and earlier, persons were talking about taking away 
choices from consumers. And yet when the options are predatory, 
you set them up to make choices that will have consequences 
that, again, would do damage to the family and further damage 
to a community that is already underserved. And, Pastor 
Warnock, you can appreciate this. I just do not want Jesus to 
say to America in the judgment, ``I was hungry, and you gave me 
a payday loan through a rent-a-bank scheme.''
    Senator Warnock. Thank you so much, Pastor Haynes, and I 
think it is an important point that you make this assumption 
about somehow we are providing options when the reality is 
people are being ghettoized and channeled and marginalized to 
these inferior loan products that set up a cycle of debt.
    Ms. Stifler, in your testimony you noted that these types 
of lenders disproportionately hit communities of color due to 
the long history of racial discrimination within housing, 
banking, lending, and employment, often aided and abetted by 
some of our Government's own policies.
    In addition to passing the Senate Joint Resolution to 
overturn this bad rule, what other actions should our Federal 
regulators take to close this predatory loophole and lessen its 
impact on vulnerable communities?
    Ms. Stifler. Senator Warnock, thank you for the question. 
Yes, I mean, there are a number of actions that can be taken at 
the Federal level, whether it is the regulators or you all in 
Congress. I think one of the key policies that could be pursued 
is a Federal interest rate ceiling, like I mentioned in my 
testimony. While 18 States plus the District of Columbia have 
strong interest rate caps on payday loans and they represent 
over 115 million people in the country, the rest of the country 
is at risk to predatory payday loans. So it is something the 
Congress can do and that we support is a Federal interest rate 
cap of 36 percent or less.
    Senator Warnock. We have to support Senate Joint Resolution 
15. This is the start, and there is more work to be done. Thank 
you so much for your testimony, and thank you, Mr. Chairman.
    Chairman Brown. Thank you, Senator Warnock.
    Senator Smith from Minnesota is recognized for 5 minutes.
    Senator Smith. Thank you, Chair Brown.
    So every year in Minnesota, people in Minnesota--and all 
across the country--are taken advantage of by financial 
institutions, by companies, by individuals acting in bad faith. 
And we know researchers and advocates like some that we have 
today on this great panel have long criticized payday lenders 
for preying on struggling consumers and trapping them in this 
cycle of debt. And too often we know that the victims of these 
abusive practices are from low-income communities and from 
communities of color. People are ripped off, and it is immoral 
and disgraceful. In Minnesota, a 2016 analysis showed that 
black Minnesotans are twice as likely as Minnesotans as a whole 
to live within 2\1/2\ miles of a payday loan store.
    So I want to drill in on this in a couple of different 
ways. I would like to start with Attorney General Stein. You 
joined a group of other Attorneys General, including our 
outstanding Attorney General from Minnesota, Keith Ellison, in 
filing a lawsuit against the OCC to challenge this so-called 
true lender rule. So can you just explain to us whether or not 
you think that this so-called true lender rulemakes it easier 
for payday lenders to rip off consumers? I mean, that is how it 
seems to me. It just makes it easier for them to do this.
    Mr. Stein. Senator Smith, thank you. Yes, absolutely, the 
effect of this fake lender rule, to be more accurate, is that 
payday lenders in States where it is illegal for them to 
operate will pay a fee to a national bank for use of its logo 
on its paperwork and then engage in payday lending in States to 
the detriment of residents where it is not a lawful product.
    Senator Smith. So not only does it make it easier for these 
payday lenders to rip people off, but it also makes it harder 
for you to do your job of protecting consumers, which is part 
of what your charter is, your job is as an Attorney General, 
right?
    Mr. Stein. There is no question. I headed the Consumer 
Protection Division in 2001 to 2008. The law banning payday 
loan lending went into effect in 2001. It took us 5 years of 
vigorous enforcement of State law until we succeeded in chasing 
out the last storefronts of payday lenders in North Carolina. 
It was hard work, but we succeeded. This new rule will put in 
jeopardy all of that hard work.
    Senator Smith. So I am struggling to understand, like, why 
would we do this? Why would anybody think that it is a good 
idea to make it easier to rip people off like this? What is the 
justification?
    Mr. Stein. Well, greed. I mean, what drives payday lending 
is greed. These folks know that they can make money. Ms. 
Stifler noted in her comments that the entire business model of 
payday lending is not someone repaying the loan. The entire 
model is dependent on a percentage of those borrowers never 
being able to repay the principal and being on the hook for the 
ongoing fees for weeks and weeks and weeks and weeks at a time. 
And if everybody repaid their loan and were done after 2 weeks, 
the business would not exist.
    Senator Smith. Right.
    Mr. Stein. It is entirely dependent on those who are 
desperate and in a hard way.
    Senator Smith. But it seems to me, Mr. Chair, that as 
policymakers we should be making it harder and not easier for 
payday lenders to prey on people who are trapped in this cycle 
of debt, and that we also need to see that these predatory 
practices do not just happen randomly across the community, 
that they specifically are targeting Black and Brown folks. And 
I would really like, in the little bit of time that I have 
left, Pastor Haynes, I so appreciate your testimony. And I am 
just wondering, as you think about your parishioners and the 
community that you serve, how would you connect this rent-a-
bank scheme with other examples in our history of policies and 
practices that have discriminated against Black and Brown 
people? I mean, specifically we have banks, for example, that 
make it harder for Black and Brown people to borrow money, and 
then at the same time we make it easier for predatory lenders 
like this to come into communities and trap people?
    Reverend Haynes. Thank you for that question, Senator 
Smith. I will just simply say that, again, we have a history of 
redlining Black and Brown communities, and that history now 
continues in that in the past, you know, neighborhoods were 
targeted or Zip codes were targeted for noninvestment, nonloan, 
nonbank opportunities, and now the target is to exploit those 
who are already vulnerable. And I think it would be just a 
novel concept for the OCC, instead of protecting predators, let 
us see to it that banks serve all consumers and all consumers 
in a way that is just, fair, and moral.
    Senator Smith. Well, I could not agree with you more. I 
think that should be the work of this Committee and the work 
that we have ahead of us. We need to understand that it is not 
an accident of history that this is happening in Black and 
Brown communities. This is the design of how things have been 
done that we need to break that pattern, and that is what I 
look forward to working on.
    Thank you very much.
    Chairman Brown. Thank you, Senator Smith, for your 
questions.
    The hearing is drawing to a close. Today's testimony makes 
it obvious why we need to overturn the OCC's true lender rule 
that enables a new group of payday lenders to resurrect the 
same old rent-a-bank scheme. How do we know this is happening? 
Just as General Stein pointed out, look at where this new group 
of payday lenders is using that strategy. They lend directly in 
States with no rate caps, but then use the rent-a-bank strategy 
in States where there are limits on the amount of interest they 
can charge, conservative States, States that are known to most 
of us as pretty Republican, States like Georgia, North 
Carolina, South Dakota--Georgia, I would argue; Senator Warnock 
might disagree with that.
    We heard talk today about how payday lenders say they 
provide options. We have heard that over and over, options and 
opportunities, but debt traps are not really reasonable 
options. We heard a lot today about access to credit and how 
overturning this rule might decrease that access. But be clear, 
we do want it to decrease access to loans at interest rates so 
high they ruin people's lives. That is the whole point of the 
hearing, the whole point of our CRA resolution.
    I would ask anyone who wonders if we really should be 
cracking down on these predatory lenders to listen to the 
testimony from workers we had on this Committee yesterday. We 
listened to five workers talk about their lives. They were 
diverse geographically, racially, gender. They talked about 
their struggles, and part of that is their struggles with debt 
when they are low-wage workers and are having difficulty. They 
have worked hard their whole lives. That hard work has never 
paid off like it should. If you believe in the dignity of work, 
you work hard, you ought to be able to get ahead.
    One worker, a woman from southern West Virginia, said, 
``They call me the working poor, but,'' she said, `` `working' 
and `poor' should not be in the same sentences.''
    If we are concerned too many people cannot afford a car 
repair or a medical bill or another emergency, the solution is 
not to trap them in a cycle of debt. It is to raise their 
wages.
    So thank you all, all five of you, for testifying, for 
being here today.
    For Senators who wish to submit questions for the record, 
these questions are due 1 week from today, on Wednesday, May 
5th, so please abide by that.
    For our witnesses, we ask you within 45 days to respond to 
any of these questions. Thank you again, all of you, for being 
here.
    The Committee is adjourned. Best wishes. Thank you.
    [Whereupon, at 11:36 a.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]
              PREPARED STATEMENT OF CHAIRMAN SHERROD BROWN
    Emerson teaches us that history is a battle between what he called 
``the innovators'' and ``the conservators.'' The innovators work to 
find new ways to make Government work for the people it serves, and 
deliver results for everyone.
    But the conservators--the corporations, the special interests, the 
elite who've amassed wealth and power at the expense of workers and 
their families--the conservators never give up.
    And so it is with predatory lending.
    In the late 1990s, payday lenders were desperate to find a way to 
evade State laws that limited them from charging exorbitant interest 
rates that trap people in a cycle of debt they can't get out of, no 
matter how hard they work.
    They came up with what the OCC called ``rent-a-charter''--what we 
now know as the ``rent-a-bank'' scheme.
    Because banks are generally not subject to these State laws, payday 
lenders funneled their loans through a small number of willing banks. 
It looked like the banks were making the loans, when it was really the 
payday lenders.
    Federal regulators, Republicans and Democrats, saw through this 
ruse.
    Under President Bush, the OCC described these rent-a-bank schemes 
as ``abusive,'' and later warned about banks that ``rent out their 
charters to third parties who want to evade State and local consumer 
protection laws.''
    In the years that followed, the OCC and FDIC shut down a series of 
these schemes by payday lenders and banks.
    States from across the country also stepped in to crack down.
    The Georgia legislature, in 2004, passed a law to crack down on 
rent-a-bank schemes. Regulators in West Virginia, Ohio, Pennsylvania, 
New York, Maryland, and other States followed suit.
    States also passed new laws to limit interest rates on payday 
loans.
    Since 2010, Montana, South Dakota, Colorado, Illinois, Virginia, 
and just last year Nebraska, all passed laws to cap interest rates on 
payday loans at 36 percent--still a very high number that will make any 
company plenty of money.
    Several other States, including California and my home State of 
Ohio, also passed laws to limit the interest that can be charged on 
consumer loans.
    These new laws passed with overwhelming, bipartisan support.
    More than 75 percent of voters in Nebraska and South Dakota 
supported the ballot initiatives to cap interest rates on payday loans.
    In recent years, new fintechs have emerged that partner with banks 
to offer responsible small-dollar loans at affordable rates.
    Of course the payday lobby didn't give up.
    And now we have a separate group of online payday lenders 
resurrecting the same old rent-a-bank scheme. They aren't even 
attempting to hide it.
    One online lender recently told its investors that it would get 
around California's new law by making loans through ``bank sponsors 
that are not subject to the same proposed State level rate 
limitations.''
    Another one said ``There's no reason why we wouldn't be able to 
replace our California business with a bank program.''
    Given the broad, bipartisan support for these laws, we all hoped 
that the Trump OCC would take action and crack down on these 
schemesschemes that have been rejected by voters and legislatures in 
State after State.
    The last Republican administration under President Bush stood up 
for consumers on this point.
    But last year, the OCC issued what's known as the True Lender Rule, 
overruling voters of both parties and giving a free pass to these 
abusive rent-a-bank schemes.
    The rule was rushed through by the Acting Comptroller who cut his 
teeth helping banks ruthlessly foreclose on homeowners and a Deputy 
Comptroller with deep ties to the payday lobby--and whom Republicans 
have selected to be witnesses at today's hearing.
    The OCC and Mr. Brooks have argued that the True Lender rule is 
necessary so that the agency has the necessary authority to oversee 
banks relationships with payday lenders.
    But that's just not true--the OCC didn't lack any authority when it 
cracked down on rent-a-bank schemes in the early 2000s.
    The OCC also attempted to justify its efforts by claiming that it 
promotes ``innovation'' and provides ``certainty'' to the markets.
    The only certainty we need is the certainty that workers and their 
families will be protected from exorbitant, exploitive interest rates.
    And the last thing we should be doing is encouraging payday lenders 
to, in their words, ``innovate''--we know that just means new ways to 
get away with ripping people off.
    That's why across the country, a broad, bipartisan coalition is 
asking Congress to overturn the OCC's harmful True Lender Rule.
    That support includes:

    the National Association of Evangelicals,

    the Southern Baptist Convention,

    and other members of the Faith in Just Lending Coalition.

    That coalition wrote to Congress, quote: ``Predatory payday and 
auto title lenders are notorious for exploiting loopholes in order to 
offer debt-trap loans to families struggling to make ends meet. The 
OCC's `True Lender' rule creates a loophole big enough to drive a truck 
through.''
    I'd also like to submit the entire letter for the record, along 
with letters from a bipartisan group of State attorneys general, State 
bank regulators, and a coalition of 375 consumer, civil rights, labor, 
and small business organizations asking Congress to overturn the True 
Lender Rule.
    Today we'll hear from one of the members of that faith coalition, 
Dr. Frederick Haynes, senior pastor of Friendship-West Baptist Church 
in Dallas, Texas.
    We'll also hear today from North Carolina Attorney General Josh 
Stein.
    General Stein represents a bipartisan coalition of State attorneys 
general, including the Republican attorneys general in Nebraska and 
South Dakota, who have called on Congress to overturn the OCC's True 
Lender Rule.
    Like so much we do, this comes back to one question: whose side are 
you on?
    You can stand on the side of online payday lenders that brag about 
their creativity in avoiding the law and finding new ways to prey on 
workers and their families.
    Or we can stand up for families and small businesses, and the State 
attorneys general and State legislatures who have said ``enough'' and 
are trying to protect themselves and their States from predatory 
lending schemes.
    Some issues that come before this committee are complicated, they 
divide people, there are thorny nuances to consider. This isn't one of 
them. It's simple: Let's stop predatory lenders instead of encouraging 
them.
                                 ______
                                 
            PREPARED STATEMENT OF SENATOR PATRICK J. TOOMEY
    Thank you, Mr. Chairman.
    In the last decade, we have seen financial technology companies--
fintechs--driving new innovations in the financial markets. Fintechs 
have had remarkable successes in developing technology-oriented 
solutions to meet consumer needs.
    As many banks have exited the personal loan market fintechs have 
filled the gap, increasing their consumer lending by 72 percent between 
2005 and 2018. Today, they issue nearly 40 percent of all unsecured 
personal loan balances.
    In recent years, both nationally chartered and State-chartered 
banks and credit unions have begun to partner with fintechs to offer 
improved products and reach more consumers. This is particularly 
beneficial for community banks, who lack resources to develop banking 
technology. In fact, 65 percent of community banks consider fintech 
partnerships important to their business strategy.
    These partnerships also generate significant consumer benefits. 
Bank-fintech partnerships generate efficiencies that can lower the 
price of financial products, expand consumer choice, and increase 
competition. Bank-fintech partners offer a large variety of credit 
products--not just small-dollar loans--including credit cards, home 
equity lines of credit, personal loans, auto loans, mortgages, and 
small business loans.
    Unfortunately, recent court rulings have applied differing legal 
tests to determine which partner in these relationships is the true 
lender who is legally responsible for the loans. These tests have 
created uncertainty that threaten to reduce access to credit for 
consumers, especially for riskier borrowers. That's why there has been 
bipartisan Congressional support and industry support for clarifying 
this issue.
    Last year, the OCC issued its True Lender rule to provide this 
much-needed regulatory clarity. This rule holds a national bank 
responsible for a loan when, at the time the loan is originated, it is 
named in the loan agreement or it funds the loan. This allows the OCC 
to supervise these loans and ensure the bank is not evading the law, 
including Federal consumer protection laws.
    Contrary to what some claim, this rule is not intended to 
facilitate ``rent-a-charter'' arrangements where banks don't comply 
with the law. In fact, the OCC's rule does just the opposite. As the 
OCC has explained, in a rent-a-charter arrangement ``a bank receives a 
fee to `rent' its charter and unique legal status to a third party . . 
. to enable the third party to evade State and local laws . . . and to 
allow the bank to disclaim any compliance responsibility for the 
loans.''
    In other words, a ``rent-a-charter'' arrangement means no party 
takes compliance responsibility for a loan. That's where the True 
Lender rule comes in. It ensures that national banks that partner with 
third parties are accountable for the loans they issue through these 
partnerships, and allows the OCC to supervise the origination of these 
loans.
    You don't have to take my word for it. The current Acting Director 
of the OCC--who has been a career civil servant for more than 30 
years--recently wrote to Congress making this very point.
    The True Lender rule also provides the clarity needed for bank-
fintech partnerships to flourish and for national credit markets to 
function. For over four decades, Federal law has allowed both 
nationally chartered and State-chartered banks to ``export'' the State 
law governing interest rates from the home State where they are based.
    This allows the bank to comply with the law of the one State where 
the bank is located, rather than the 50 different States where its 
customers are located, in order to facilitate an interstate market for 
credit. The True Lender rule allows fintechs to partner with banks, 
which already operate with these efficiencies.
    Uncertainty about who the true lender is creates uncertainty about 
whether the bank can export its interest rate. If the bank guesses 
wrong, the loan could be unenforceable. This uncertainty jeopardizes 
the viability of bank-fintech partnerships. More importantly, it also 
disrupts the functioning of the secondary market for credit.
    Why does the secondary market matter? When a bank sells a loan it 
frees up capital to make more loans. Perhaps the best-known 
illustration is mortgages. When a bank sells a mortgage to the GSEs it 
frees up capital to lend to additional homebuyers. The same principle 
applies to the secondary market here.
    Banks will likely issue far fewer loans if they cannot reliably 
sell them into the secondary market. Fewer loans means less access to 
credit; less access means higher costs and less willingness to provide 
the limited supply of credit to higher-risk borrowers. The result? The 
most marginalized consumers are hit the hardest.
    This isn't just my opinion. Almost 50 leading financial economists 
from prominent universities--including Harvard, Stanford, and the 
University of Pennsylvania--made these very points in an amicus brief 
in support of the OCC's True Lender rule.
    We have empirical evidence, too. Studies have shown that after a 
2015 court ruling created uncertainty around the ability to export 
interest rates to New York, it became significantly harder to get loans 
in New York, especially for higher-risk borrowers.
    Despite the importance of the True Lender rule, some Democrats want 
to rescind it using the Congressional Review Act. The rationale appears 
to be that overturning the rule may subject more loans to State 
interest rate caps.
    However, price controls are not the answer. They exclude people 
from the banking system. Price controls restrict the credit supply and 
make it harder for low-income consumers to access needed credit.
    The best form of consumer protection is a robust, competitive 
market. Preserving the regulatory certainty and clarity the True Lender 
rule advances that cause.
                                 ______
                                 
                    PREPARED STATEMENT OF JOSH STEIN
               Attorney General, State of North Carolina
                             April 28, 2021
    Mr. Chairman and Members of the Committee, my name is Josh Stein, 
the Attorney General of North Carolina. I am pleased to have this 
opportunity to discuss the OCC's so-called True Lender Rule. This rule, 
if not reversed, provides a get-out-of-jail-free card to predatory 
lenders who violate State laws limiting interest rates and fees on 
consumer loans.
    Many States set rate caps on consumer loans. For instance, in my 
home State of North Carolina, the maximum legal rate for consumer loans 
under $4,000 is 30 percent. These State consumer protection lending 
laws enjoy broad and bipartisan support, not only in North Carolina but 
across the country. For example, in the 2020 election, more than 82 
percent of Nebraska voters approved a ballot measure to cap interest on 
payday loans at 36 percent. South Dakota voters approved a similar 
measure in 2016. Many of these lenders in our States are licensed, 
well-regulated, and compliant with State usury laws.
    However, for as long as States have protected their resident 
borrowers from predatory lenders, those lenders have sought to evade 
State laws. Greed is a powerful motivator. One of their favorite ruses 
in recent decades has been to dress up the paperwork of their loans to 
make them look to be made by an entity exempt from State usury law, 
such as a national bank regulated by the OCC.
    The courts have long recognized and outlawed these subterfuges that 
put form over substance. A longstanding legal principle, dating as far 
back as a 1835 U.S. Supreme Court opinion written by Chief Justice 
Marshall, demands an ``examin[ation] into the real nature of the 
transaction'' to determine whether a loan violates usury laws.
    Many States including my own have incorporated Chief Justice 
Marshall's reasoning into their State law through the ``true lender'' 
doctrine (or sometimes called the ``de facto lender'' doctrine). It is 
a principle of State law that typically looks to whether a predatory 
lender retains the ``predominate economic interest'' in the loan to 
determine whether the predatory lender is the loan's true lender and 
therefore must comply with State rate caps.
    North Carolina and other States have relied on the ``true lender'' 
doctrine to combat the illegal schemes of modern predatory lenders. 
North Carolina has a long history of strong laws and vigorous 
enforcement against payday lending. For a brief experimental period, 
from 1997 to 2001, North Carolina law allowed payday loans, and our 
State became home to 10 percent of the payday loan storefronts in the 
Nation with a heavy concentration in neighborhoods of color and near 
military bases. During that time period, we learned firsthand the 
economic damage these loans inflict on working families. The median 
loan was for $244 for a period of 8-14 days at an APR of 419 percent. 
The average borrower got more than 8 loans from the same store, and one 
out of seven borrowers took out more than 19 loans per year. These 
loans were not a source of occasional credit as their marketing 
suggested but rather a debt treadmill from which borrowers had trouble 
escaping; for a person struggling to keep their head above choppy 
financial waters, the loans were not a life preserver but an anvil.
    Let me tell you briefly about Arthur Jackson (not his real name), a 
warehouse worker and grandfather of 7, who lives in Raleigh, NC, went 
to the same Advance America payday store for over 5 years. He got a 
single $200 loan, that was later increased to $300. Advance America 
flipped the same loan over 100 times, collecting $52.50 for each 
transaction, while extending him no new money. He ended up paying 
interest of over $5,000 for the loan, fell behind on his mortgage, and 
had to file for bankruptcy to save his home.
    Lisa Terry, from Winston-Salem, NC, was a single mother making less 
than $8 an hour. She went to a payday store and got a $255 loan. Two 
weeks later, like so many borrowers, she didn't have the funds to pay 
it off, so she renewed or ``rolled over'' the loan. She paid renewal 
fees every 2 weeks for 17 months--paying $1254 in fees alone--without 
paying down the loan. She thought she was getting new money each time, 
not realizing that she was simply borrowing back the $300 she had just 
repaid. She said, ``I felt like I was in a stranglehold each payday. 
After a while, I thought, `I'm never going to get off this merry-go-
round.' I wish I'd never gotten these loans.''
    Finally, Anita Monti, a 61 year old grandmother from Garner, made 
$9 an hour working second-shift at computer hard drive manufacturer. 
She wanted to buy her five grandchildren presents for Christmas, but 
she was living paycheck to paycheck. She went to an Advance America 
store and borrowed $300, less a $45 fee. In two weeks, she didn't have 
the money she owed, and her electric bill was due. So, she borrowed 
another $300, not realizing it was the same $300 over again. Only after 
getting a raise to $12 an hour and scrimping on food was she able, a 
year later, to pay the almost $2,000 in fees she paid week after week 
to get that $300 loan. As she said, ``I needed the cash to get through 
the week. It didn't cross my mind that I was borrowing back my own 
money.''
    Due to the exorbitant interest rates of the loans and patterns of 
harmful, repeat borrowing that buried in debt thousands of North 
Carolinians like Arthur, Lisa and Anita, North Carolina's legislature 
allowed the law to sunset in September 2001. After the sunset, most 
payday lenders complied with the law and closed their doors. However, 
others looked for ways to circumvent North Carolina law through 
subterfuges, including rent-a-bank schemes. In particular, several 
national payday lending chains, including ACE Cash Express and Advance 
America, reached out to a few rogue national and State-chartered banks 
[including Goleta National Bank, Peoples National Bank of Paris 
(Texas), Republic Bank & Trust (of Kentucky) and First Fidelity Bank of 
Burke (South Dakota)] to which North Carolina's interest rate caps did 
not apply.
    The banks' names were placed on the loan documents identifying the 
banks as the lenders, and the payday lenders continued making loans at 
sky-high interest rates of up to 521 percent to North Carolina 
consumers. The payday lenders contended, based on the loan documents, 
that they were no longer lenders--and that they were instead the 
``marketing, processing, and servicing agents'' of the banks. Very 
notably, the payday lenders only used these ``rent-a-bank'' schemes in 
States like North Carolina that prohibited payday lending; in other 
States that allowed these high-rate loans, the payday lenders made the 
loans in their own names.
    The North Carolina Attorney General's office under then Attorney 
General, now Governor, Roy Cooper took action against these schemes. I 
directed the Consumer Protection Division at that time. We asserted 
that the payday loans were covered by the true lender doctrine, which 
has been an integral part of North Carolina law since the 1800s. In 
February 2005, together with the Office of the North Carolina 
Commissioner of Banks, we brought an enforcement action against Advance 
America, which had continued its rent-a-bank arrangements.
    In December 2005, the Commissioner of Banks held that Advance 
America was, in fact, engaged in the business of lending in North 
Carolina and was therefore subject to North Carolina usury law. Advance 
America stopped making loans in North Carolina. Subsequently, in March 
2006, three other large payday lending chains, Check Into Cash, Check 
`n Go, and First American Cash Advance, all of which had used out-of-
State banks, also agreed to stop making payday loans in North Carolina.
    North Carolina is by no means alone in protecting borrowers; other 
States have also relied on the true lender doctrine, as adopted in 
their State's common law, to stop payday lenders from using sham rent-
a-bank schemes to evade States' interest rate laws. Examples of States 
that have taken action against rent-a-bank schemes in the last two 
decades using the true lender doctrine include, among others, Colorado, 
the District of Columbia, Georgia, New York, Ohio, Pennsylvania, and 
West Virginia. In each of these cases, the sole purpose for the payday 
lenders' entering into arrangements with the banks was, or is, to make 
loans to our States' residents at rates that are unlawful. There is no 
other purpose, because these lenders can, and do, make loans in their 
own name in States where they can--thus, these ``rent-a-bank'' 
arrangements are a blatant sham to evade State laws.
    The OCC's new, so-called True Lender Rule will upend States' 
ability to protect their people. In fact, calling it the ``True Lender 
Rule'' is an upside down farce; it is more accurate to call it the 
``Fake Lender Rule'' because it overturns the true lender doctrine 
developed by States. It allows predatory lenders to avoid State rate 
caps by slapping the name of a national bank on the loan's paperwork. 
This is literally taking the paper form and elevating it over the 
loan's substance. Under the rule, it does not matter that the predatory 
lender in a rent-a-bank scheme retains the ``predominate economic 
interest'' in the loan.
    The OCC, through the Acting Comptroller, not only rammed through 
the Fake Lender Rule one week before the 2020 election, but it did so 
unlawfully. The OCC radically exceeded its statutory authority in 
issuing the rule. Although the OCC purports to be interpreting portions 
of three Federal banking laws, none of them authorize rent-a-bank 
schemes or give the OCC authority to preempt the State law true lender 
doctrine.
    The rule is also unlawful because the OCC ignored the centuries of 
court decisions recognizing and refining the true lender doctrine. The 
OCC's interpretation as set forth in the rule is unreasonable because 
it supplants well established court precedent established over 
centuries with an artificial and unprecedented standard. Reputable 
lenders submitted comments to the OCC warning the rule may create legal 
confusion for various types of standard lending arrangements, but the 
OCC refused to address those concerns. Indeed, the OCC has never 
identified a single court or regulator that has used the standard it 
adopts in the rule.
    The rule's endorsement of predatory lenders' ruses unlawfully 
ignored the OCC's own historical opposition, under the Clinton, Bush, 
and Obama administrations, to rent-a-bank schemes and to the prospect 
of abusive, triple-digit interest-rate loans being made to financially 
distressed consumers in States that expressly forbid such loans. In the 
early 2000s during the Bush administration, consistent with its 
guidance, the OCC took action against at least four national banks that 
had entered into rent-a-bank schemes with nonbank payday lenders; the 
OCC's orders required the national banks to terminate their 
partnerships with the payday lenders and to cease making the loans. 
And, as recently as 2018, in small dollar loan guidance the OCC 
declared that it ``views unfavorably an entity that partners with a 
bank with the sole goal of evading a lower interest rate established 
under the law of the entity's licensing State(s).'' However, shortly 
before promulgating the Fake Lender Rule, the OCC inexplicably withdrew 
that guidance and is now implicitly, if not explicitly, supporting 
rent-a-bank schemes with this new rule.
    This new rule is galling not only because it ignores court and 
administrative precedent, but also because the OCC flouted the commands 
of Congress in finalizing it. In the Dodd-Frank Act, Congress required 
the OCC to adhere to strict procedural requirements before preempting 
State consumer protection laws to prevent the OCC from repeating its 
horrendous record on preemption that led to the Great Recession. But in 
issuing the Fake Lender Rule, the OCC refused to comply with the 
procedural requirements mandated by Congress.
    State attorneys general from California, New York, Colorado, the 
District of Columbia, Massachusetts, Minnesota, New Jersey, and North 
Carolina filed a lawsuit in the Southern District of New York 
challenging this rule. We are optimistic about our ability to reverse 
the rule through litigation.
    That said, I urge Congress to exercise its power under the 
Congressional Review Act to reign in a rogue OCC that believes it can 
disregard Congressional mandates. The congressional review process 
provides a far more straightforward means to reverse the Fake Lender 
Rule than litigation and the potential years it will take to secure a 
final court ruling. I am pleased that a bipartisan group of 25 
Attorneys General, including General Rutledge of Arkansas, General 
Peterson of Nebraska, and General Ravnsborg of South Dakota, recently 
urged Congress to disapprove this new rule under the Congressional 
Review Act because it will facilitate predatory lending in our States.
    Protecting our constituents is our highest calling. Playing a small 
role in running out of my State the payday lenders that abused hard-
working people like Arthur, Lisa, and Anita is something I take immense 
pride in. As Senators, you have the authority to help people like them 
all across this country. It is an awesome power, and I ask that you 
exercise it.
                                 ______
                                 
                 PREPARED STATEMENT OF LISA F. STIFLER
        Director of State Policy, Center for Responsible Lending
                             April 28, 2021






































































                                 ______
                                 
      PREPARED STATEMENT OF REVEREND DR. FREDERICK D. HAYNES, III
      Senior Pastor, Friendship-West Baptist Church, Dallas, Texas
                             April 28, 2021
    Good morning Chairman Brown, Ranking Member Toomey, and Members of 
the United States Senate Committee on Banking, Housing, and Urban 
Affairs. I am Frederick Douglass Haynes, III. I serve as Senior Pastor 
of Friendship-West Baptist Church, a congregation of 12,000 
parishioners in Dallas, Texas.
    I am grateful for the opportunity to come before you to speak on 
behalf of a broad and diverse faith community to morally appeal to you 
to see how important it is to stop those who would use their greed to 
exploit those in need through high-cost predatory debt traps that we, 
of many faith traditions, overwhelmingly consider usury.
    Usury and economic exploitation of the poor are condemned in all 
faith traditions. Those who exploit the poor through predatory 
practices are referred to as ``wolves'' in the scriptures. The 
predatory practitioners of ``Rent-A-Bank'' schemes may well be referred 
to as wolves dressed up in the legitimacy of a bank. The victims of 
such practices, however, testify that an economic predator by any other 
name is still trapping the desperate in debt. These ``moral monsters,'' 
to use the language of James Baldwin, feed their greed at the expense 
of the vulnerable.
    For us, it is a simple matter of right and wrong, and we strongly 
oppose the Office of the Comptroller of the Currency's plan to enable 
predatory lenders to ignore State interest rate caps by paying a bank 
willing to masquerade as the ``true lender.'' A few rogue banks are 
already participating in these exploitative agreements, and the OCC's 
rule would certainly bless the arrangement of laundering predatory 
loans and allow such devious schemes to proliferate.
    For many years, people of faith have come together and made a 
priority of challenging debt traps clad in deceptive wardrobes ranging 
from the crass quick-cash neon signs that litter the neighborhoods of 
the needy, to the polished promises of ``fintech'' lenders who claim to 
be the saviors of families who need ``access to credit,'' and the 
regulators who agree.
    The con, of course, is that the ``access'' they impose on these 
families is a deceitful dead end to a debt booby trap, as they aim to 
draw them into a machine calibrated to siphon funds from their bank 
accounts until they have all but bled them dry. In many cases, their 
harm goes beyond reaping fees several times the dollar amount of their 
customer's original loan to forcing a closed account, and thus sinking 
that family into a sea of bad credit options and ending their access to 
mainstream banking services. Many must file bankruptcy due to the moral 
bankruptcy of the predatory lenders, who make them pay a high cost for 
being poor.
    I have seen the real-world impact of these debt traps on the lives 
of my parishioners far too often. A grandmother who had recently lost 
her husband and needed cash for medicine took a $300 loan, and 
responsibly paid it off. But not before the debt trap machine did what 
it was designed to do and rolled her over several times, until she had 
paid back $800 for that $300 loan.
    Another of my congregants, a recent college graduate, worked two 
jobs to make ends meet. When his mother became sick, he had to choose 
between paying his car loan and her medication and utilities. He took 
out a payday loan believing it would help him get through the crunch, 
but an interest rate of 450 percent set him up to bring him down 
financially, and he ended up losing the car he needed to get to work.
    Unfortunately, these are just two of many examples of persons who 
experienced the ``soul killing'' of working hard for so little, while 
coming up short and needing an extension that dug them deeper into 
debt.
    This clearly harmful and underhanded practice is played out in 
congregations of all faith traditions all across the country, and in 
communities that are already economically bereft, and underbanked. 
Predatory payday, car title lender and installment lenders rob 
financially vulnerable people of billions in fees every year, by 
replicating a dreadful, disadvantageous practice and hiring lobbyists 
to put a halo on their devilment for lawmakers and regulators.
    Faith leaders across Christian, Jewish, and Muslim traditions have 
for decades been compelled to join together in the battle against usury 
and predatory lending debt traps. Faith groups representing 118 million 
Americans mobilized to call on the Consumer Financial Protection Bureau 
to enact a strong rule addressing the inimical systems of payday 
lending debt traps; and have been up in arms again as the rule faces 
threats.
    I am a part of a coalition of conscience, Faith for Just Lending, 
that includes Christian denominations from the right to the left and 
across the broad middle who are bound together in opposition to 
predatory lending and inspired by a vision of fair and just financial 
practices that serve the dignity of all of our American families. The 
coalition includes Catholic Charities USA, Center for Public Justice, 
Cooperative Baptist Fellowship, Ecumenical Poverty Initiative, Ethics & 
Religious Liberty Commission of the Southern Baptist Convention, Faith 
in Action (formerly PICO National Network), National Association of 
Evangelicals, National Baptist Convention USA, National Latino 
Evangelical Coalition, The Episcopal Church, and United States 
Conference of Catholic Bishops, to name a few.
    I am especially appalled by the harm done to communities that face 
historic divestment, who are exploited and suffer from economic 
injustice. These communities have historically been crippled by 
redlining and now they are being ripped off by the social violence of 
financial predators. For decades banks used maps to deny loans to 
communities of color and now they are using maps to serve as loan 
sharks of those same communities. We know that payday lenders have a 
history of setting up shop in Black and Brown neighborhoods; we have 
seen this firsthand in the community surrounding our church, and 
research bears it out. Now these payday lenders are shifting to online 
loans through rent-a-bank schemes and targeting the same struggling 
communities.
    That the OCC would open up our communities to more exploitation at 
a time when we are suffering so severely from COVID-19 and its economic 
impact is immoral and disgraceful, especially when we have seen some of 
these predatory lenders get Paycheck Protection Program (PPP) relief 
funds that kept their debt traps functioning through the crisis. That 
the OCC would make a rule giving predatory lenders a way to charge 200-
400 percent interest and more, even in States that have fought hard to 
stop this predation with a 36 percent interest rate cap--that is indeed 
obscene, and as we would put it in my faith community, sinful and 
demonic.
    I offer with my testimony, letters from the Faith for Just Lending 
coalition and the Faith & Credit Roundtable calling for a repeal of the 
OCC's rule. All are engaged with efforts to end poverty; and are deeply 
concerned about the impact of the rule on our hardworking families and 
our financially vulnerable communities. The States have the authority 
and the responsibility of protecting consumers from predatory lenders, 
and Congress and the OCC must respect that authority.
    We ask for your recognition of the vast, deep financial harm 
predatory lending causes along with the hurt and disruption it causes 
to families. We ask for you to follow the model of Jesus and announce, 
``Good news to those made poor by economic exploitation'' and pass a 36 
percent cap. There is a way to provide access to credit without 
engaging in legalized loansharking.
    We ask, finally, for your strong and proactive support of the 
Congressional Review Act that will overturn the OCC's true lender rule, 
and remember the wisdom of Thomas Piketty who warns, ``When private 
interests exceed the interest of the public, we cease to be a republic 
or a democracy.''
    Thank you for the opportunity to share my testimony today. I look 
forward to answering any questions you may have.










                 PREPARED STATEMENT OF BRIAN P. BROOKS
               Former Acting Comptroller of the Currency
                             April 28, 2021
Introduction
    Chairman Brown, Ranking Member Toomey, and Members of the 
Committee, thank you for the opportunity to appear before you today to 
discuss the Office of the Comptroller of the Currency's (OCC's) True 
Lender Rule and its importance for access to credit, bank balance sheet 
management, and the safety and soundness of the banking system.
    It is important to note at the outset that the True Lender Rule \1\ 
was adopted by the OCC following the earlier implementation of the 
separate ``valid when made'' rule. \2\ ``Valid when made,'' discussed 
more fully below, was adopted along substantially similar lines by both 
the OCC and the Federal Deposit Insurance Corporation (FDIC). \3\ While 
a Congressional Review Act resolution has been filed in the House of 
Representatives and the Senate with respect to the True Lender Rule, 
the time period for filing any such resolution with respect to the 
earlier ``valid when made'' rule elapsed some time ago. That means that 
the rule today is that both national banks (under the OCC's rule) and 
State banks (under the FDIC's rule) may originate loans at an interest 
rate lawful under the law of the State where the bank is located, and 
may sell such loans to nonbank investors, without regard to interest 
rate caps in the State where the borrower or downstream investor is 
located. Nullification of the True Lender Rule will not change that. As 
explained below, the purpose of the later-adopted True Lender Rule is 
simply to clarify when a bank is the true lender with respect to a 
particular loan and provide a bright line as to when OCC examination 
and enforcement authority applies to ensure compliance with consumer 
protection and other legal requirements with respect to the loan. Since 
the ``valid when made'' rule will continue in force in any event, it is 
important to consider the potential negative effects of undoing a rule 
whose purpose is to ensure that banks exercising their authority under 
``valid when made'' principles comply with legal requirements when they 
engage in secondary market transactions.
---------------------------------------------------------------------------
     \1\ 85 FR 68742 (Oct. 30, 2020).
     \2\ 85 FR 33530 (June 2, 2020).
     \3\ See 85 FR 44146 (July 22, 2020).
---------------------------------------------------------------------------
``Valid When Made,'' Secondary Markets, and Access to Credit: 
        Increasing Credit Availability to Low- and Moderate-Income 
        Americans by Allowing Banks to Leverage Their Balance Sheets 
        Through Fintech and Other Partnerships
    The total demand for consumer credit in the United States far 
exceeds the amount of bank balance sheets dedicated to that business 
segment. \4\ Moreover, State interest rate caps historically made it 
harder for residents of some States to access credit than residents of 
other States. Congress and the Supreme Court have addressed these 
problems in two ways. First, the Supreme Court's 1978 decision in 
Marquette Nat'l Bank of Minneapolis v. First of Omaha Serv. Corp. \5\ 
and Congress' 1980 enactment of the Depository Institutions 
Deregulation and Monetary Control Act allowed both national and State 
banks to export their home State's interest rate to customers in other 
States. Marquette reached a bipartisan result. The case was 
successfully argued by Robert Bork, and Justice William Brennan 
authored the decision for a unanimous Court. Congress' decision to 
expand the Marquette rule on interest rate exportation to State banks 
as well as national banks was similarly bipartisan, passing with an 
overwhelming majority of both Democrats and Republicans and signed into 
law by President Jimmy Carter. In short, in the inflation crisis of the 
late 1970s, when the prime rate peaked at 21.50 percent and some States 
had 8 percent usury caps, American leaders of all political stripes 
understood the importance of allowing State interest rate exportation 
to improve access to credit.
---------------------------------------------------------------------------
     \4\ https://www.federalreserve.gov/releases/g19/current/
     \5\ 439 U.S. 299 (1978).
---------------------------------------------------------------------------
    The second way Congress addressed the inadequacy of bank balance 
sheets to address all consumer loan demand is in empowering national 
banks to sell their loans to third parties. The National Bank Act 
provides that banks may enter into contracts, and the Supreme Court has 
held consistently for almost 200 years that banks' contracting powers 
specifically include the power to sell and assign their interest in 
loans to investors. \6\ The implication for credit access is clear: 
When a bank sells a loan, it frees up balance sheet to make the next 
loan. This is true when a bank sells a consumer loan to a marketplace 
lender; when a bank sells a mortgage to one of the GSEs; or when a bank 
securitizes its credit card receivables. The principle is the same: 
Banks tap secondary market investors to sell loans and use the proceeds 
to make more loans. If we think access to credit is a good thing--and 
Federal Reserve research shows that countries with more widely 
available credit have lower poverty rates \7\--it follows that letting 
banks make more loans rather than less is desirable.
---------------------------------------------------------------------------
     \6\ See Planters' Bank of Miss. v. Sharp, 47 U.S. 301 (1848).
     \7\ See, e.g., https://www.dallasfed.org/-/media/documents/
research/eclett/2006/el0610.pdf.
---------------------------------------------------------------------------
    This idea was called into question in the 2015 Second Circuit Court 
of Appeals decision in Madden v. Midland Funding LLC. \8\ In marked 
contrast to the bipartisan consensus of the late 1970s surrounding 
interest rate exportation, some advocates cheered Madden for enforcing 
a State usury law and protecting consumers from high interest rates. 
But the reality of that ``protection'' was far murkier. Multiple 
studies of the effect of Madden on credit markets found that, when 
unable to sell higher interest rate loans to investors, banks focused 
their lending activities on smaller loans to wealthier and higher-
credit-score consumers. \9\ One study found that banks in the States 
subject to the Madden ruling reduced lending to LMI borrowers by an 
astounding 64 percent. \10\ In short, the available evidence showed 
that enforcing a State usury limit against a bank-originated loan did 
not make credit less expensive for LMI borrowers; it made credit less 
available. This evidence is supported by the analysis of numerous 
economics and finance professors who submitted a brief amicus curiae in 
support of the OCC's position in litigation brought by the State of 
California and others seeking to challenge the ``valid when made'' 
rule. \11\
---------------------------------------------------------------------------
     \8\ 786 F.3d 246 (2d Cir. 2015).
     \9\ See Colleen Honigsberg et al., ``How Does Legal Enforceability 
Affect Consumer Lending? Evidence from a Natural Experiment'', 60 J.L. 
& Econ. 673, 675 (2017) (cited in McShannock v. JP Morgan Chase Bank, 
N.A., No. 19-15899 (9th Cir. 2019)).
     \10\ See Piotr Daniesewicz and Ilaf Elard, ``The Real Effects of 
Financial Technology: Marketplace Lending and Personal Bankruptcy'' 22 
(2018), https://tinyurl.com/y5s3s7oh.
     \11\ See https://www.occ.gov/publications-and-resources/
publications/economics/hamiltons-corner/amicus-brief.pdf.
---------------------------------------------------------------------------
    Madden was at a minimum a legally debatable decision and not in 
line with either preexisting precedent nor later authorities. In 2005, 
another Federal court of appeals held that ``the assignee of a debt . . 
. is free to charge the same interest rate that the assignor . . . 
charged the debtor . . . even if the assignee does not have a license 
that expressly permits the charging of a higher rate.'' \12\ During the 
Obama administration, the Solicitor General opined that the Madden 
court ``erred in holding that State usury laws may validly prohibit a 
national bank's assignee from enforcing the interest-rate term of a 
debt assignment that was valid under the law of the State in which the 
national bank is located.'' \13\ And just last year the U.S. Court of 
Appeals for the Ninth Circuit criticized Madden at length in holding 
that another State law that impaired the ability of national banks to 
sell loans in the secondary market was preempted. \14\
---------------------------------------------------------------------------
     \12\ Olvera v. Blitt and Gains, P.C., 431 F.3d 285, 286, 289 (7th 
Cir. 2005).
     \13\  https://www.justice.gov/sites/default/files/osg/briefs/2016/
06/01/midland.invite.18.pdf
     \14\ McShannock v. JP Morgan Chase Bank NA, https://
cdn.ca9.uscourts.gov/datastore/opinions/2020/09/22/19-15899.pdf.
---------------------------------------------------------------------------
The True Lender Rule: Providing Clarity Necessary To Allocate 
        Responsibility for Legal Compliance
    While the OCC and FDIC ``valid when made'' rules clarified 
established law regarding banks' powers to sell loans in the secondary 
market without jeopardizing the enforceability of the relevant 
interest-rate terms, it did not specify when the bank was the legal 
originator of the loan and when a fintech, marketing partner, or other 
nonbank company was the legal originator. The purpose of the True 
Lender Rule is to provide clarity on that question.
    Prior to the True Lender Rule, courts employed a variety of 
subjective multifactor balancing tests to determine who the true lender 
was with respect to a given loan transaction. In New York and 
Connecticut, the States subject to the Madden decision, the question 
was irrelevant because even if a bank actually originated the loan the 
interest rate became unenforceable following sale to a nonbank 
investor. But outside those States, the complicated question of who is 
the true lender consumed enormous litigation resources to resolve in 
any given case. In some cases, courts held that a bank was the true 
lender and thus upheld the enforceability of the transaction against a 
usury challenge. \15\ In other cases presenting similar circumstances, 
courts held that the bank's involvement was not sufficient to make it 
the true lender and held the transaction to violate State usury laws. 
\16\
---------------------------------------------------------------------------
     \15\ See, e.g., Beechum v. Navient Solutions, Inc., 2016 WL 
5340454 (C.D. Cal. Sept. 20, 2016).
     \16\ See, e.g., CFPB v. CashCall, Inc., 2016 WL 4820635 (C.D. Cal. 
Aug. 31, 2016).
---------------------------------------------------------------------------
    One purpose of the True Lender Rule was to eliminate the 
uncertainty caused by subjective multifactor balancing tests--
uncertainty that had the potential to seriously disrupt secondary 
markets (including securitization markets) for consumer loans and 
reduce access to credit, particularly among those who need it most. It 
did not seem controversial to simply answer the question of whether the 
bank or another party was in fact the true originator of a loan. But 
another purpose of the True Lender Rule was to address allegations 
about ``rent-a-charter'' schemes. While ``rent-a-charter'' is not a 
legal or technical concept, OCC staff took the concept to refer to 
situations in which a nonbank paid a fee to a bank for the sole purpose 
of evading legal requirements, without the bank actually being involved 
in loan underwriting, risk management, or legal compliance. In short, 
the OCC took ``rent-a-charter'' to mean an arrangement in which the 
nonbank was seeking to ensure that no one was actually responsible for 
consumer protection or other compliance obligations.
    That is precisely why the OCC, in issuing the True Lender Rule, 
expressly stated that it would ``hold[ . . . ] banks accountable for 
all loans they make, including those made in the context of marketplace 
lending partnerships or other loan sale arrangements.'' \17\ 
Specifically, the OCC emphasized its ``expectation that all banks 
[will] establish and maintain prudent credit underwriting practices and 
comply with applicable law, even when they partner with third 
parties.'' \18\ If not, ``the OCC will not hesitate to use its 
enforcement authority consistent with its longstanding policy and 
practice.'' \19\ This is in contrast with historical practice in which 
banks sought to minimize their role in loan origination at the same 
time their marketing partners sought to disclaim responsibility as the 
true lender. Under the True Lender Rule, the days of each party 
pointing the finger at the other are over; borrowers and regulators now 
know who is responsible if the bank either is named on the note or 
funds the loan on the date of origination. This clarity thus is 
positive not only for secondary market functioning, but for consumer 
protection accountability.
---------------------------------------------------------------------------
     \17\  https://www.federalregister.gov/documents/2020/10/30/2020-
24134/national-banks-and-federal-savings-associations-as-lenders
     \18\ Id.
     \19\ Id.
---------------------------------------------------------------------------
    The OCC has a long history of holding banks accountable for failing 
to manage the consumer protection obligations and compliance risks of 
third-party service providers, including those partners involved in 
making loans to consumers. In the early 2000s, the OCC took several 
groundbreaking actions that are precedents for preventing abuses in 
certain relationships. \20\ Those actions continue to provide an 
important playbook for consumer protection today and demonstrate the 
value of strong Federal supervision.
---------------------------------------------------------------------------
     \20\ See, e.g., OCC NR 2002-85 (https://www.occ.gov/news-
issuances/news-releases/2002-nr-occ-2002-85.html); NR 2003-6 (https://
www.occ.gov/news-issuances/news-releases/2003/nr-occ-2003-6.html); NR 
2003-3 (https://www.occ.gov/news-issuances/news-releases/2003/nr-occ-
2003-3.html).
---------------------------------------------------------------------------
True Lender and the Role of States: The Dual Banking System, Parity, 
        and Usury
    Some critics of interest rate exportation claim that it undermines 
State authority over their own credit markets. That has not been the 
view of leaders of either party historically. As noted above, the 
Marquette decision holding that national banks may export their home 
States' interest rate to borrowers in other States was argued by Robert 
Bork and decided by Justice William Brennan writing for a unanimous 
Supreme Court; the Depository Institutions Deregulation and Monetary 
Control Act, which extended interest rate exportation powers to State 
banks, was approved by overwhelming majorities of both parties in 
Congress and signed into law by President Jimmy Carter; and President 
Obama's Solicitor General took the position that Madden, the most 
prominent case to criticize interest rate exportation in the context of 
secondary market loan sales, was wrongly decided. Nonetheless, the 
argument persists that States should be able to establish the rules for 
their own credit markets, and that interest rate exportation somehow 
interferes with that principle.
    The most straightforward answer to this concern is that Congress 
viewed the correct balance of State and Federal power through the lens 
of the dual banking system. In Congress' view, the most important 
concern was not preserving State usury laws but ensuring that State 
banks operate on a level playing field as national banks. Thus, as 
noted, Congress gave State banks the same authority to export their 
home States' interest rates that national banks enjoyed under 
Marquette.
    Second, nothing about the True Lender Rule (as distinct from the 
``valid when made'' rule, which is not under Congressional Review Act 
challenge) affects State authority to set rules regarding when a State-
chartered bank (as opposed to a marketplace lender) is the true 
originator of a given loan. This is why the OCC and FDIC both adopted 
versions of the ``valid when made'' rule, but only the OCC adopted the 
True Lender Rule. The OCC, as the chartering agency for national banks, 
has the statutory authority to interpret national bank powers. The 
FDIC, which is not a chartering agency, lacks that authority with 
respect to State banks. Thus States remain free to set their own true-
lender rules for their own chartered banks if they wish to do so.
    Third, nothing about the True Lender Rule alters State authority to 
license, supervise, and enforce laws applicable to nonbank lenders. In 
fact, nonbank consumer lenders, including virtually all payday lenders 
today, operate as State-licensed companies and are subject to State 
supervision. The OCC supports strong State supervision of the nonbank 
lenders and encourages States to use the full extent of their authority 
to protect consumer from abuses that occur among these service 
providers. The point of the companion ``valid when made'' and True 
Lender Rules, however, is that it is not an ``abuse'' for a bank to 
exercise its statutory authority to export its lawful interest rate to 
borrowers in other States and to sell loans including such rates in the 
secondary market.
    Finally, it bears emphasis that it was Congress' decision--not the 
OCC's--to allow both State and national banks to export interest rates. 
That long-settled decision was not a departure from Alexander 
Hamilton's view of State-Federal relations in our system of federalism. 
In the same way that the first Bank of the United States was deemed 
immune from State taxation because the ``power to tax involves the 
power to destroy'' an instrumentality of national economic policy, \21\ 
a State power to constrain interest rates agreed in loans originated by 
federally chartered banks would impede the functioning of the national 
banking system--itself one of the most important aspects of national 
economic policy. But States can set their own ``true lender'' rules for 
their banks in the same way that they can charter their own banks, and 
the existence of the national banking system is not a threat to State 
sovereignty in either situation.
---------------------------------------------------------------------------
     \21\ McCulloch v. Maryland, 17 U.S. 316 (1819).
---------------------------------------------------------------------------
    Thank you for the opportunity to testify today and I look forward 
to answering the Committee Members' questions.
                                 ______
                                 
               PREPARED STATEMENT OF CHARLES W. CALOMIRIS
 Henry Kaufman Professor of Financial Institutions, Columbia Business 
                                 School
                             April 28, 2021
    Chairman Brown, Ranking Member Toomey, Members of the Senate 
Banking Committee, it is a pleasure to be with you today to discuss the 
economic benefits that arise from allowing financial institutions of 
various kinds to partner with each other in providing lending services 
to their customers. This partnering is especially advantageous when it 
occurs in the context of an integrated national market for loans, which 
has produced enormous improvements in market efficiency and financial 
inclusion.
    I emphasize that the gains from flexible partnerships among 
financial intermediaries in providing various aspects of banking 
services not only result in improvements in aggregate efficiency and 
better loan pricing for consumers on average; the gains also include 
greater financial inclusion for our unbanked or underbanked citizens, 
and that is particularly apparent in the new partnerships that are 
developing between traditional enterprises and new fintech firms. At 
the end of my statement I provide an appendix, which I will not present 
orally, but which I ask you to admit as part of my written statement, 
which summarizes in detail how fintech firms, in particular, are 
contributing so much to improvements in financial inclusion.
    The understanding that it is advantageous to encourage an 
integrated national market that permits diverse businesses with 
different comparative advantages to work together is not new. In the 
Supreme Court's unanimous Marquette decision in 1978, empirical 
evidence of these economic advantages informed the Justices' opinions, 
and since then, over the past four decades, a massive amount of 
evidence in support of this proposition has been published in top 
economics journals.
    Recently, a nonpartisan group of 47 leading scholars of banking 
working at America's greatest universities summarized this literature 
in an amicus brief, which was filed in support of the Office of the 
Comptroller of the Currency's (OCC's) defense of its ``true-lender'' 
rule. \1\ My testimony here today will summarize for you that 
consensus, which is remarkably clear and unequivocal. While economic 
analysis often provides a mixed and inconclusive picture, in this case, 
the conclusions about the advantages of an integrated national system 
are unambiguous and the magnitude of the effects described are large, 
which explains why a very prominent group of nonpartisan bank scholars 
found it so easy to reach rapid agreement on their strong conclusions.
---------------------------------------------------------------------------
     \1\ These scholars are faculty at the following institutions: 
Babson College, Boston College, Columbia University, Cornell 
University, Dartmouth College, Fordham University, Harvard University, 
Indiana University, London Business School, Louisiana State, New York 
University, Northwestern University, Ohio State University, Stanford 
University, University of Akron, University of California-Berkeley, 
University of California-Irvine, University of Chicago, University of 
Florida, University of Kansas, University of Maryland, University of 
North Carolina, University of Pennsylvania, University of Texas, 
University of Virginia, University of Washington, Utah State, 
Vanderbilt, Washington University in St. Louis.
---------------------------------------------------------------------------
Economic Advantages of Banks' Partnering With Others To Provide Loan-
        Related Services
    As background, the OCC's ``true lender'' rule clarified that a bank 
that originates a loan retains the consumer protection obligations 
related to making that loan whether or not it sells the loan to another 
party. This rule guards against fears of shady origination practices, 
``rent-a-charter'' schemes, or predatory lending for consumer loans 
that are originated within the Federal banking system and sold to 
others. The rule adheres to longstanding legal precedents by making it 
clear that the origination of the loan is the act of lending. The sale 
of the loan, like the sale of any asset, does not change that fact.
    Some State authorities have sought to impose new limits on 
interstate banking by claiming that the act of selling a loan somehow 
changes who the original lender was and potentially invalidates the 
terms of the loan, which were valid when made. A key goal of this legal 
theory appears to be preserving the ability of the State to enforce 
usury laws that limit interest rates on loans to its residents. For 
example, a national or State bank in South Dakota can originate a loan 
with a borrower in California at a rate above the California usury 
ceiling, and then sell it to another lender.
    Ever since the unanimous Supreme Court Marquette decision in 1978 
it has been clear that a federally chartered bank headquartered in one 
State may originate loans in other States, and when doing so the bank 
is not bound by the usury laws of the States other than the one in 
which it is headquartered. The new challenge to interstate banking 
invents a new theory that somehow the terms of a loan at origination, 
such as its interest rate, are rendered impermissible as the result of 
the sale of the loan.
    Obviously, if this new theory were upheld in the courts, it would 
wreak havoc on the national market for loan sales. But why should 
anyone care? Why does the ability to sell a loan matter to individual 
consumers?
    As I alluded to before, 47 prominent academic economists 
specializing in banking and bank regulation have just provided the 
answers to those questions in a brief filed in support of the OCC's 
position in the case in question. \2\ Their cogent analysis, 
summarizing decades of academic research on the social gains that have 
been reaped from the growth of the loan sales market that occurred 
after the Marquette decision, deserves widespread public attention. My 
summary of their argument includes many direct quotations, which are 
excerpts from the brief.
---------------------------------------------------------------------------
     \2\ ``Brief of Amicus Curiae in Opposition to Plaintiffs' Motion 
for Summary Judgment and in Support of Defendants' Cross-Motion for 
Summary Judgment'', U.S. District Court, Northern District of 
California, Oakland Division, Case No. 20-cv-05200-JSW, Hon. Jeffrey S. 
White, Filed January 21, 2021.
---------------------------------------------------------------------------
    Their central insight is that the competitive abilities to 
originate loans, to hold loans, or to perform other services related to 
loan, can differ across different financial service providers. One bank 
may be positioned well to originate a particular loan while a different 
bank may be better positioned to hold it. The divergence of comparative 
advantage in origination and holding loans reflects ``diverse 
regulatory frameworks, information processing capabilities and access 
to capital.''
    ``Therefore, a bank's pool of local loanable funds will not 
necessarily always match the loan demand generated by the supply of 
local investable projects. Some markets will have an oversupply of good 
borrowers that cannot be funded by banks, while other markets will have 
an excess of funds due to the lack of good borrowers. The ability to 
transfer loans between institutions improves efficiency and production 
in both types of markets, by allowing funds to flow across space. Local 
institutions can exploit local information to make good origination 
decisions, whereas other institutions having excess local funds are 
able to hold more good loans than they would otherwise be able to make 
to (their) local borrowers.''
    ``If . . . the usury law of the loan buyer's State applied to the 
loan, the market for loan sales would be significantly disrupted: an 
institution in one State could legally make the loan but institutions 
in other States may not purchase it with the same pricing. 
Consequently, the integrated secondary market for loan sales would be 
reduced and fragmented across groups of States with similar usury laws. 
Therefore, to preserve a well-functioning market for loan sales, the 
OCC's Rule should be maintained.''
    Why does preserving efficiency in the loan market matter? 
``Economists have found that a well-functioning secondary market for 
loans has three benefits and these benefits would be mitigated if loan 
sales are restricted. First, loan sales expand the supply of credit by 
giving originating banks the opportunity to finance loans less 
expensively. The expansion of the banking system's aggregate lending 
capacity and the allocation of capital to the most productive projects 
regardless of location have important macroeconomic implications, such 
as greater economic growth.''
    ``Second, loan sales reduce the risk of lending amongst banks by 
allowing greater diversification of lending portfolios. By buying loans 
from around the country, banks can reduce their exposure to the 
geography-specific risk in their immediate area. Banking system risk 
can also be reduced by sharing it with nonbank buyers of loans.''
    ``Third, the expansion of lending and lowering of risk made 
possible by loan sales should lead to more financial inclusion and 
broader access to credit. Studies have shown that loan sales reduce the 
interest rates that borrowers pay on their loans and increase the 
likelihood that borrowers will receive a loan. These advantages should, 
in theory, be especially important for small and risky borrowers, who 
are often excluded from receiving loans when credit is constrained. 
Such financial inclusion has been highlighted as important for economic 
growth and a more equal distribution of wealth and income. Moreover, 
many innovative new (fintech) lenders rely on loan sales as a means of 
leveraging their origination capabilities, which can carry particular 
benefits for less wealthy or higher-risk borrowers. Encouraging loan 
sales will allow innovative new lenders to originate loans on a larger 
scale. Limits on the viability of the loan sales market would therefore 
have adverse effects on the underserved by limiting their ability to 
receive lower cost loans as well as receive funds through innovative 
financial inclusion intermediaries.''
    In other words, if the market for loan sales disappeared, credit 
supply would be reduced, and banks would become riskier, leading banks 
to charge more for all loans. Furthermore, the borrowers who would be 
hardest hit by this change would be those at the lowest rungs of the 
credit ladder, the ``small and risky borrowers,'' because loan sales 
are playing a particularly important role in expanding financial 
inclusion, particularly for new fintech lenders.
    The amicus brief points out that interstate loan sales are not a 
sideshow in our financial system. ``The benefits of loan sales are 
clearly indicated by the fact that loan sales constitute a central 
component of the banking business. And while some loan sales would 
remain legal regardless of the court's ruling, the activity and depth 
of the secondary loan market would be limited if the court required 
that sold loans conform to the usury laws of the purchaser's State.''
    So, the benefits of interstate loan sales to consumers, especially 
the most vulnerable borrowers, are substantial. But shouldn't we worry 
that allowing loan sales across State lines undermines the 
effectiveness of usury laws? Doesn't that aspect of loan sales harm 
consumers? The brief, and the research it references, shows that more 
than four decades of research on this question provide a clear answer: 
no.
    ``The academic literature on the relative benefits and costs of 
maintaining usury rates provides a useful context for the decision. 
Usury rates attempt to restrict any potential market power that banks 
can use to disadvantage borrowers. However, usury ceilings also could 
differentially curtail loans to riskier and lower-quality borrowers, 
thus pushing them towards less-regulated types of borrowing. Empirical 
research quite broadly supports the notion that the latter effect 
dominates: that riskier-looking borrowers (who are often minorities or 
others with limited financial access) are hurt when usury ceilings are 
binding and benefited when they are loosened or eliminated. 
Interpreting the National Bank Act in a way that, contrary to the 
statutory scheme and the OCC's interpretation, allows usury laws from 
States not connected to the original loan transaction to frustrate loan 
sales, therefore, is likely to reduce the economic advantages of the 
secondary loan market in ways that adversely affect income and wealth 
distribution within the economy.''
    As I noted at the outset, rarely does economic analysis provide 
such clear, unambiguous conclusions. But in this case, scores of 
academic studies over many years repeatedly have reached the same 
conclusions. Well-intentioned advocates of limiting the interstate loan 
sales market in the interest of helping the poor need to read this 
amicus brief and the studies it cites.
    To the many insightful points made in the amicus brief I want to 
close with two of my own observations. First, advocates of usury laws 
sometimes point to borrowers' lack of information as a rationale for 
usury laws. For example, a borrower that would qualify for a loan at 8 
percent may not be aware that he or she would qualify for that loan, 
and a lender might trick him or her into agreeing to a loan with a much 
higher interest rate. This sort of trickery is possible when loan 
markets lack competition, and when borrowers lack information about 
their own credit risk. As the appendix to my testimony shows, the role 
of new fintech entrants in strengthening competition and empowering 
borrowers with new sources of information are precisely the reasons 
that fintech firms are making important contributions to financial 
inclusion. Rather than rely on usury laws and try to limit fintech-bank 
partnerships and thereby reduce the supply of credit, the right 
approach to dealing with potentially abusive credit practices is to 
encourage new partnerships with these new borrower empowering fintech 
providers.
    Finally, there is a broader point that also deserves emphasizing, 
which the authors of the brief did not make. The Federal banking system 
was created in part to guarantee that Americans can participate in a 
national credit market by virtue of their status as American citizens. 
By maintaining a Federal banking system, we ensure that citizens have 
the economic freedom to enter into contracts with federally chartered 
banks if they wish to do so. When they do so, they are aware that 
Federal bank regulators, such as the OCC, maintain a strong and 
credible commitment to monitor those banks to ensure that credit and 
other banking services are provided in a manner consistent with safe 
and sound banking, as well as ethical treatment of consumers. In my 
experience as a public servant, and in my research as a historian of 
the OCC, I can affirm that this commitment is real, and that it should 
be a great source of pride to our country. It makes the economic 
freedom to engage in a Federal banking system especially meaningful and 
beneficial for consumers. The Federal banking system is not just a 
collection of banks, it is and always has been a source of economic 
freedom that empowers individuals and in doing so keeps our financial 
system, economy, and Nation strong.
Appendix: Fintechs as Levers for Financial Inclusion
    Not only are new unbundled fintech providers more profitable and 
efficient than traditional banks, their technologies are proving to be 
very promising for improving access to financial services for many 
people who have not been served well by traditional banks, especially 
lower-income people. They can do so either as stand-alone service 
providers or acting in partnerships with other banks.
    The U.S. banking system serves about 80 percent of American 
families' needs to make payments, save, and borrow. But what about the 
other 20 percent, the so-called unbanked and underbanked? What barriers 
explain why the normally reliable pressure of market competition has 
not led banks to compete for the business of such a large fraction of 
the population? How are fintech banks (a term I will use to refer both 
to chartered and nonchartered, ``shadow'' fintech banks) breaking down 
some of those barriers?
    Historically, the barriers that have kept the unbanked or 
underbanked from becoming fully integrated into the formal financial 
sector consist of several supply-side and demand-side factors. On the 
supply side, these include challenges lenders face in differentiating 
borrowers' risks, the high transaction costs of serving small-dollar 
customers, and the costs of regulatory uncertainty (which are often 
defined on a per-customer basis, and therefore, disproportionately 
disadvantage small dollar customers). On the demand-side, factors such 
as the limited financial resources of low-income customers, their 
limited experience with financial service providers, and their 
preferences for particular kinds of products can limit access.
    With respect to demand-side factors, how have fintech banks 
improved financial access for the unbanked or underbanked? According to 
an FDIC survey, 13 percent of unbanked households state that banks do 
not offer products or services that they need. For example, a majority 
of unbanked or underbanked households live paycheck to paycheck, cannot 
afford the high standard minimum balances or account fees banks 
require, and do not live near branches. \3\ To meet some of these 
demands, fintech banks have developed different products that may be 
particularly attractive to unbanked or underbanked households. In 
particular, fintech banks provide novel products with low-cost fees or 
and smaller minimum small dollar amount loans. For example, some offer 
free overdraft protection (typically limited to up to $100) \4\ or 0 
percent APR cash advance that requires no credit check and no monthly 
fee (limited to $250). \5\ Many now offer bank accounts with no monthly 
fees, no overdraft fees for limited overdraft protection, and no 
minimum balance fees, as well as no ATM fee access for in-network ATMs. 
\6\ The common denominator of these products is that physical cost 
savings from operating as a fintech provider make it more economical to 
serve small-dollar amount customers, which is particularly advantageous 
to low-income customers.
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     \3\ Indeed, about 9 percent of unbanked household cite 
inconvenient location or inconvenient hours as the reason for not 
having a bank account.
     \4\ Chime.com; Varomoney.com; Dave.com.
     \5\ Moneylion.com.
     \6\ Chime.com; Varomoney.com; Dave.com; Moneylion.com.
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    Other fintech banks have designed products to smooth spending in 
the face of high frequency fluctuations in customers' incomes. Because 
there is a lag between the days wages are earned and the day that 
employees are paid, some fintech banks have attracted unbanked and 
underbanked customers by offering ``paycheck deposits.'' \7\ Instead of 
depositing paycheck funds into a customer's account with the 
traditional delay (waiting for the funds to clear from the employer's 
bank), these fintech banks deposit the funds as soon as the transfer 
instructions are received, taking on the minimal risk that the 
employer's bank is unable to fund the transaction. This decreases the 
customer's waiting time by 2 days. Other fintech banks offer customers 
access to their wages in advance of the pay day on terms that are 
generally far superior to payday lenders or to the costs of paying 
traditional bank overdraft fees. \8\
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     \7\ Chime.com; Varomoney.com; Dave.com; Moneylion.com.
     \8\ Even.com and Payactiv.com.
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    Fintech banks also cater to unbanked and underbanked customers' 
demands by designing innovative and convenient means for customers to 
access services through mobile phones, therefore obviating the need to 
be near a branch. Because the majority of unbanked and underbanked 
households have mobile phones, fintech banks have been able to attract 
many low-income customers by offering mobile phone access.
    Consumers with limited financial experience sometimes make 
financial decisions that damage their credit record and leave high-cost 
lenders as their only option. Financial education and counseling 
services can reduce these costly mistakes. While academic evidence 
regarding the impact of financial education and counseling has been 
mixed, there is evidence that certain approaches provide benefits. In 
particular, education appears to be most effective when it is targeted 
to a particular borrower's needs and is delivered at the time the 
knowledge can be used. \9\ For example, research has shown that 
mortgage counseling conducted at the time a mortgage is originated can 
reduce default rates. \10\
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     \9\ Fernandes, D., Lynch, J.G., Jr., and Netemeyer, R.G. (2014) 
``Financial Literacy, Financial Education and Downstream Financial 
Behaviors''. Management Science 60: 1861-83.
     \10\ Agarwal, S., Amromin, G., Ben-David, I., Chomsisengphet, S., 
and Evanoff, D. (2020) ``Financial Education Versus Costly Counseling: 
How To Dissuade Borrowers From Choosing Risky Mortgages?'' American 
Economic Journal: Economic Policy 12: 1-32.
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    Many fintech banks provide precisely this form of financial 
counseling as part of the loan products they offer. They use a wide 
range of educational services to build relationships with customers 
that have limited experience with financial transactions. One online 
lender offers lower rates for completing their online courses on 
managing debt, \11\ while another online lender prominently advertises 
``community support'' whereby borrowers are connected with free and 
trusted financial counselors. \12\ Other fintech banks produce free 
content for customers or potential customers to help explain when and 
how their products fit into a well-managed financial plan or to 
instruct customers on managing finances and debt more generally. \13\ 
Finally, many comparison shopping fintech banks provide free tools for 
consumers to evaluate alternative debt scenarios, such as debt 
consolidation, or to create a plan to reach a savings goal. \14\ To 
reduce confusion or misunderstandings that can undermine trust, some 
fintech providers have developed products that alert customers when 
they are at risk of being charged a fee, thus helping to reduce fees 
and improve their decision making. \15\
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     \11\ Lendup.com.
     \12\ Oportun.com.
     \13\ Personifyfinancial.com; Saverlife.org.
     \14\ Nerdwallet.com; Lendingtree.com.
     \15\ Opportunities for mobile financial services to engage 
underserved consumers (FDIC 2016).
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    With respect to supply-side factors, many innovative fintech 
business models are reducing the costs of serving customers. These 
costs consist of physical costs and information costs. Physical costs 
are lower for fintechs because they avoid the high overhead costs of 
traditional banks, which is especially beneficial to small-dollar 
account customers.
    With respect to information costs, many unbanked and underbanked 
customers are ``credit invisibles''--people without formal credit 
scores. That lack of information makes it challenging to lend to them. 
For an estimated 26 million Americans, traditional credit products 
remain out of reach because they lack a credit score. \16\ These 
``credit invisibles'' often turn to payday lenders, pawn shops, or 
auto-title lenders, or end up paying high overdraft fees at traditional 
banks. Such borrowing is expensive, with APRs as high as 300 percent. 
\17\ What's more, repayment of these loans often doesn't establish a 
credit score so experience in these markets brings borrowers no closer 
to cheaper credit. Instead, they end up in cycles of accumulating debt. 
Such borrowing amounts to over 280 million transactions per year and 
roughly $78 billion in revenue. \18\
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     \16\ https://files.consumerfinance.gov/f/201505--cfpb--data-point-
credit-invisibles.pdf
     \17\ https://www.urban.org/sites/default/files/publication/57871/
410935-analysis-of-alternative-financial-serviceproviders.pdf
     \18\ https://www.urban.org/sites/default/files/publication/57871/
410935-analysis-of-alternative-financial-serviceproviders.pdf
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    An important aspect of fintech banks' ability to provide improved 
access to credit for consumers comes from their use of new sources of 
information. \19\ By using information not traditionally found in a 
credit report, lenders are able to safely and affordably lend to 
customers with little or no credit history. Fintech banks such as 
Oportun and Upstart have advertised that using alternative data has 
allowed them to successfully provide credit to households who lack the 
formal credit scores required by most financial institutions. Some 
fintech lenders have started to use consumers' cash flow history--how 
much income flows into the person's bank accounts and how much spending 
draws out of them--to underwrite credit, while other fintech lenders 
use utility and telecom payment data to inform their risk-scoring. One 
study finds that roughly half of credit invisibles interested in 
obtaining credit have stayed current on all of their bills in the past 
12 months. \20\ By using such alternative credit data to approve loans, 
fintech lenders can offer lower prices than their traditional 
counterparts. A LexisNexus study finds that of the 24 percent of 
consumers in their sample without a credit bureau score, \21\ 86 
percent became scorable using RiskView, a credit score that uses 
alternative data. However, the proportion of unbanked and underbanked 
consumers who would benefit from such a score or other applications of 
alternative data is hard to estimate precisely.
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     \19\ See Jagtiani, J., and John, K. (2018) ``Fintech: The Impact 
on Consumers and Regulatory Responses''. Journal of Economics and 
Business 100: 1-6.
     \20\ https://www.fdic.gov/householdsurvey/2017/2017report.pdf
     \21\ Consumers who did not have enough credit history to be 
scorable because it either did not have recent activity on their 
credit, only nontradeline data, or no credit obligations open for a 
long enough duration.
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    We are seeing only the beginning of what fintech banks can do to 
improve the efficiency of the financial system and promote financial 
inclusion. The industry continues to evolve as new and better 
approaches enter the market. As with traditional lending, fintech 
lending entails safety, soundness, and fairness risks. But the 
financial services industry and its regulators are well equipped to 
handle these risks.
               RESPONSES TO WRITTEN QUESTIONS OF
              SENATOR CORTEZ MASTO FROM JOSH STEIN

Q.1. A 2018 audit \1\ by Nevada's Division of Financial 
Institutions found that nearly one-third of payday lenders in 
Nevada had failed to abide by State laws and regulations each 
year. Does the OCC's Rule allow payday lenders to evade State 
laws outside of interest rate caps?
---------------------------------------------------------------------------
     \1\ https://www.leg.state.nv.us/Division/Audit/Full/BE2018/
LA%2018-18%20Division%20of%20Financial%20Institutions%20Report.pdf

A.1. The OCC Rule will predictably spur the proliferation of 
rent-a-bank schemes by nonbank lenders in order to evade both 
State interest rate caps and other State consumer protection 
laws. When nonbank lenders hide behind rent-a-bank subterfuges, 
the nonbank lenders typically claim they are exempt from 
licensing by and examination from State banking regulators. 
This refusal by lenders using rent-a-bank schemes to comply 
with State licensing laws profoundly undercuts the ability of 
States to regulate these lenders' activities, including 
ensuring that the lenders comply with State laws outside of 
interest rate caps.
    In North Carolina's experience in the early 2000s, multiple 
nonbank payday lenders turned to rent-a-bank subterfuges after 
North Carolina's law authorizing payday lending for an 
experimental period sunset in 2001. The nonbank payday lenders 
largely continued their payday lending business as they had 
before the sunset, but the banks' names were instead placed on 
the loan documents in order to evade North Carolina's interest 
rate caps. These nonbank payday lenders contended that they 
were merely the ``marketing, processing and servicing agents'' 
of the banks and that they were exempt from regulation by 
financial regulators in our State. The North Carolina 
Commissioner of Banks and then-Attorney General Roy Cooper 
rejected that argument as contrary to the true lender doctrine 
recognized by North Carolina law. The OCC's Rule undercuts my 
ability to defend against such arguments in the future.

Q.2. If the OCC's Rule remains in place, what impact can we 
expect on communities of color who are disproportionately 
impacted by the pandemic?

A.2. The OCC's Rule will promote predatory lending in the 
substantial number of States that have enacted State interest 
rate caps. Studies have shown that such high-cost lending 
disproportionally affects communities of color. For example, 
FDIC surveys have reported that in 2013-2017, 12-14 percent of 
African-Americans and 8-10 percent of Latinos used a form of 
high-cost credit (payday loans, refund anticipation loans, 
rent-to-own services, pawn shop loans, and auto title loans), 
compared with only 6 percent of Whites. \2\ Therefore, I expect 
the OCC's Rule would have a disproportionate impact on 
communities of color and other populations whose financial 
vulnerability increased because of the pandemic.
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     \2\ FDIC National Survey of Unbanked and Underbanked Households: 
2017, appendix table D.3, https://www.fdic.gov/analysis/household-
survey/2017/2017appendix.pdf.

Q.3. Does the OCC's Rule limit the ability of State bank 
---------------------------------------------------------------------------
regulators to identify and prosecute fair lending violations?

A.3. The OCC's Rule will predictably limit the ability of State 
bank regulators and other State enforcement agencies to 
identify and prosecute fair lending violations. For the reasons 
explained in response to your first question, the OCC's Rule 
will embolden nonbank lenders that would otherwise be subject 
to licensing and examination by State financial regulators to 
claim an exemption from such State requirements. It is 
significantly more difficult for State financial regulators to 
identify and prosecute violations of fair lending against 
entities that they do not license and examine.

Q.4. Under its current authorities, is the OCC capable of 
appropriately supervising rent-a-bank arrangements?

A.4. Under long-standing statutory and case law, nonbank 
lenders, including payday lenders, are subject to State law and 
historically have been regulated at the State level. Rent-a-
bank arrangements are initiated by nonbank lenders to evade 
State interest rate laws in States with strong interest rate 
caps. These schemes are typically not used by nonbank lenders 
in States that authorize payday lending. The OCC, as a Federal 
banking regulator, does not supervise or regulate nonbanks. 
Therefore, where nonbank lenders use rent-a-bank arrangements 
as a shield, there exists a regulatory vacuum, as these nonbank 
lenders contend they are not subject to State regulation, at 
the same time that the OCC does not examine or regulate them. 
Currently, there are several OCC-supervised banks that have 
entered into arrangements with nonbank lenders that are making 
predatory triple-digit interest rate loans to consumers and 
businesses that are illegal under many States' lending laws. 
However, the OCC has not only failed to take any recent 
enforcement actions against the nonbank lenders, but it has 
also ignored the banks it supervises, refusing to stop these 
rent-a-bank arrangements and these lending activities. Under 
this so-called ``True Lender'' Rule, these rent-a-bank 
arrangements are tacitly, if not explicitly, approved, so the 
OCC will have no incentive to take action against these 
arrangements; and State Attorneys General and State banking 
regulators will have substantially less authority to do so--
leaving these sham arrangements to flourish and their predatory 
loans to harm our consumers in violation of States' laws.
                                ------                                


               RESPONSES TO WRITTEN QUESTIONS OF
           SENATOR CORTEZ MASTO FROM LISA F. STIFLER

Q.1. If the OCC's Rule remains in place, how would it affect 
the use of payday lending in Nevada, which has no State 
interest rate cap on payday loans?

A.1. If the OCC's ``fake lender'' rule remains in place, 
States, like Nevada, that currently allow payday lending or 
other high-cost lending will see more predatory lending come to 
the State, and future efforts to address predatory lending will 
be incredibly difficult. Additionally, beyond payday lending, 
Nevada will see high-cost installment loans that are currently 
illegal under State law expand via rent-a-bank schemes. 
Although Nevada allows payday loans, the State caps the 
interest rate on a $2,000, 2-year loan at about 40 percent. The 
OCC's rule will allow nonbank lenders to partner with banks to 
make similar sized loans at rates over 200 percent APR.

Q.2. A 2018 audit \1\ by Nevada's Division of Financial 
Institutions found that nearly one-third of payday lenders in 
Nevada had failed to abide by State laws and regulations each 
year. Does the OCC's Rule allow payday lenders to evade State 
laws outside of interest rate caps?
---------------------------------------------------------------------------
     \1\ https://www.leg.state.nv.us/Division/Audit/Full/BE2018/
LA%2018-18%20Division%20of%20Financial%20Institutions%20Report.pdf

A.2. Yes, the OCC's rule will not only allow nonbank lenders, 
like payday and other high-cost lenders, to evade the interest 
rate caps. They will also be able, in many States, to evade 
licensing and oversight laws and related regulations, as well 
as other consumer protections in State law, including fair 
---------------------------------------------------------------------------
lending laws.

Q.3. During the COVID-19 pandemic, have you seen an increase in 
the number of payday loans made to borrowers?

A.3. According to a Veritec report \2\ of 7 States, there was a 
decrease in payday lending during COVID-19. Overall, payday 
lending transaction volumes have trended downward. During the 
pandemic, the report showed ``a decline of roughly 20 percent 
for the week ending March 21. Transaction activity 
progressively trended downward between the week ending March 14 
and early May 2020 when compared to the same periods in 2019.'' 
We also have seen in SEC filings from large high-cost lenders 
that they have decreased originations during the pandemic. 
Volumes have also decreased due in part to moratoriums and 
stimulus relief; however, as the country reopens, we anticipate 
seeing originations increase.
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     \2\ https://www.veritecs.com/wp-content/uploads/2020/07/Veritec-
COVID-study-rev.pdf

Q.4. If the OCC's Rule remains in place, what impact can we 
expect on communities of color who are disproportionately 
---------------------------------------------------------------------------
impacted by the pandemic?

A.4. Communities of color have been disproportionately impacted 
by the pandemic. They are also disproportionately targeted by 
high-cost lenders. Rather than help communities of color, high-
cost lending disproportionately harms communities of color, 
exploiting and fueling the racial wealth gap. We can expect 
more of the same if this rule remains in effect.
    Online lenders often promote their models as expanding 
economic inclusion, which will often put borrowers of color 
among their target borrowers. Communities of color have 
historically been disproportionately left out of the 
traditional banking system, a disparity that persists today. 
Some defend the high-cost ``fintech'' loans as bringing 
communities of color into the economic mainstream. But high-
cost loans, particularly with their high association with lost 
bank accounts, drive borrowers out of the banking system and 
exacerbate this disparity. By sustaining and exacerbating an 
existing precarious financial situation, high-cost lending 
reinforces and magnifies existing income and wealth gaps--
legacies of continuing discrimination--and perpetuates 
discrimination today.

Q.5. Does the OCC's Rule limit the ability to identify and 
prosecute fair lending violations?

A.5. The OCC's Rule will impede the ability of States to 
identify and especially prosecute fair lending violations. 
Because the Rule will give nonbank lenders the ability to hide 
behind a national bank charter so long as that bank's name is 
on the paperwork, attempts by States to enforce their laws 
against the nonbank lenders will be challenged as being 
preempted by Federal law. And yet, the OCC will not oversee or 
examine the nonbank lenders for fair lending or other 
violations because the OCC only oversees national banks. As a 
result, a potentially large group of high-cost lenders will be 
able to evade oversight by both State and Federal financial 
regulators, making enforcement of State, and potentially even 
Federal, fair lending laws quite challenging.

Q.6. Under its current authorities, is the OCC capable of 
appropriately supervising rent-a-bank arrangements?

A.6. The OCC does not need the Rule to appropriately supervise 
and take action against banks that engage in predatory rent-a-
bank schemes. The agency already has that authority. It took 
action in the early 2000s to crack down on illegal schemes that 
were intended to evade State interest rate laws, and it can do 
so now. However, the agency has chosen not to act, despite 
being fully aware of predatory small business loans being made 
at rates as high as 268 percent by World Business Lenders 
(WBL), assisted by OCC-supervised Axos Bank. Additionally, the 
OCC defended WBL in court. \3\
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     \3\ https://morningconsult.com/opinions/new-fdic-occ-proposal-
puts-small-businesses-in-the-path-of-loan-sharks/
              Additional Material Supplied for the Record

           LETTER IN SUPPORT OF S.J. RES. 15 AND H.J. RES. 35




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